This record-setting stock market rally is living on borrowed time

January 15, 2024 | by


The stock market rally is reaching new heights, but according to Mark Hulbert, it may not be sustainable. With an influx of cash flooding the market, there is little sideline cash left to invest and propel prices even higher. Market timers, who focus on timing the broad market, are more bullish than ever before, indicating excessive optimism. While this doesn’t guarantee an immediate stumble in the market, it suggests that the rally may be living on borrowed time. With contrarian analysis pointing to potential trouble ahead, investors should proceed with caution.

This record-setting stock market rally is living on borrowed time

The stock market rally is running out of support from contrarian analysis

Contrarian analysis, which looks at market sentiment and investor behavior to make informed predictions, is indicating that the current stock market rally may be losing momentum. The main reason for this is the lack of available cash in equity portfolios. Previously, there was a significant amount of cash held on the sidelines, but now that cash is back in the market, leaving little additional sideline cash to drive prices higher in the coming months.

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Cash in equity portfolios is back in the market

One of the key factors contributing to the waning support for the stock market rally is the influx of cash into equity portfolios. Cash that was previously held on the sidelines is now being reinvested in the market, reducing the amount of sideline cash available for further investments. This implies that there may not be enough buying power to push prices significantly higher in the near future.

This record-setting stock market rally is living on borrowed time

Short-term stock market timers are extremely bullish

Short-term stock market timers, who specialize in timing the market based on short-term trends and indicators, are currently exhibiting extreme bullishness. These timers are more optimistic about the market now than at almost any other time since data began being collected in 2000. Their bullishness suggests that they expect further upward movement in stock prices.

Average recommended equity exposure level is higher than 99.3% of trading days since 2000

The average recommended equity exposure level of market timers is currently higher than it has been on 99.3% of trading days since 2000. This is a significant indication of the optimism currently pervading the market. Such high levels of recommended equity exposure are rare and may be a cause for concern from a contrarian perspective.

Bullishness is bearish according to contrarian analysis

Contrarian analysis suggests that high levels of bullishness among investors can actually be a bearish signal for the market. When the majority of investors are excessively optimistic, it may be an indication that sentiment has become too positive and that a market reversal may be imminent. The current high levels of bullishness, therefore, may be a cause for caution rather than celebration.

The Hulbert Stock Newsletter Sentiment Index illustrates timers’ bullishness

The Hulbert Stock Newsletter Sentiment Index (HSNSI) provides a measure of market timers’ average recommended equity exposure level. It is currently indicating a high level of bullishness among timers. The chart below displays the HSNSI and shows that it has entered the top 10% of its distribution since 2000, which corresponds to a zone of excessive optimism. This further supports the notion that current bullishness may be cause for concern.

The Nasdaq market timers remain less optimistic

While market timers focusing on the broader market are displaying high levels of bullishness, timers focusing on the Nasdaq market are relatively less optimistic. This may have contributed to the continued strength of the stock market rally despite the excessive optimism among other timers. The caution exhibited by Nasdaq market timers could have provided the rally with the necessary room to continue its upward momentum.

The Hulbert Nasdaq Newsletter Sentiment Index is increasingly optimistic

The Hulbert Nasdaq Newsletter Sentiment Index (HNNSI) reflects the average recommended equity exposure of Nasdaq-focused timers. While these timers were previously less optimistic, the HNNSI is now indicating an increase in optimism, with the index standing at the 92nd percentile of its historical distribution. This aligns with the excessive optimism observed among broader market timers and further supports the idea of an increasingly bullish sentiment among investors.

Deteriorating sentiment picture doesn’t guarantee an immediate market stumble

Despite the deteriorating sentiment picture and the excessive optimism among market timers, it’s important to note that this doesn’t guarantee an immediate market stumble. Contrarian analysis is just one factor that influences the market, and even when sentiment is on target, the market doesn’t always respond immediately. It is possible for stocks to rally in the short term before eventually succumbing to the gravitational pull of excessive optimism.

The future of the stock market rally is uncertain

Based on the current sentiment, it appears that the stock market rally is increasingly living on borrowed time. The excessive optimism among market timers and the lack of sideline cash in equity portfolios suggest that further upward momentum may be limited. However, it’s important to remember that the market is influenced by a multitude of factors, and predicting its future movements with certainty is challenging. As such, the future of the stock market rally remains uncertain. Investors should proceed with caution and closely monitor market conditions and sentiment indicators to make informed investment decisions.


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