Good news: Wall Street’s in a bad mood

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Commentary: Contrarians see a strong wall of worry — a good sign

By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) — Contrarian analysis is just as bullish today as it was one week ago, despite the impressive rally since then.

In fact, some sentiment indexes are painting an even more bullish picture today than then.

This is very encouraging news, from a contrarian point of view. The usual pattern is for market timers to become more bullish as the market rises. That the average market timer did not become more bullish suggests there is a very robust wall of worry for the stock market to climb.

Consider the average recommended equity exposure among those short-term market timers monitored by the Hulbert Financial Digest who focus on the Nasdaq market (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). This average currently stands at minus 43.8%, which means that the typical Nasdaq market timer is currently recommending that his clients allocate nearly half of their equity portfolios to going short.

That would be noteworthy at any time, since rarely has the HNNSI been this low. But it’s especially so right now, since the stock market is coming off such a strong rally. After all, from its intraday low a week ago, the S&P 500 index  is now 11% higher.

What's behind the recent stock rally? Sentiment

As the S&P 500 closes below 1,100, sentiment is so bearish that, among contrarians, this scenario ends up being a support for higher prices, according to MarketWatch's Mark Hulbert.

In fact, it’s been over a year since the HNNSI was as low as it is today. That prior occasion was early September 2010, and — incredibly — the Nasdaq Composite index is 17% higher today than then.

In other words, the average Nasdaq-oriented market timer is as pessimistic today as he was when the Nasdaq was a whole lot lower.

Now that’s a wall of worry.

Climbing that wall, how high can the market go? Contrarians typically do not attempt to answer this question, since it depends on what happens to sentiment if and when the market does rally.

The most bullish scenario, from a contrarian perspective, would be for the market timers to remain aggressively bearish as the market rose. In that event, contrarians would argue that the rally has yet more staying power.

Less bullish would be for the advisers to quickly jump back on the bullish bandwagon in coming days.

For now, though, the wall of worry looks quite robust, strong enough to support a continuation of the rally.

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