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A June swoon in the stock market seems likely

  • By Mark Hulbert,
  • MarketWatch
  • – 06/02/2014
  • Domestic Stocks
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Should you get ready for a June swoon?

It wouldn't be a bad idea. The stock market's sentiment foundation is weaker now than it's been in several months.

That foundation's deterioration over the past month has been particularly stark. You may recall that, at the beginning of May, I reported that there was a surprising amount of skepticism, if not outright bearishness, among the short-term market timers I monitor and that, on contrarian grounds, we therefore "should see higher market prices during the next month or so." The S&P 500 (.SPX) is 3% higher than where it stood then.

Today, in contrast, that so-called wall of worry has given way to complacency and hope — moods that typically are not conducive to a strongly rising market.

Consider the average recommended equity exposure among short-term stock-market participants who focus on timing swings in the NASDAQ (.IXIC) (as measured by the Hulbert NASDAQ Newsletter Sentiment Index, or HNNSI). This is perhaps the most sensitive of the sentiment indexes that the Hulbert Financial Digest maintains, since the NASDAQ market is itself quite sensitive to changes in investor mood.

A month ago, the HNNSI stood at 6%. Today it's at 43.8%. So the past month has witnessed a marked move toward the bullish bandwagon.

Even more worrisome is another sentiment index that I calculate. This one is based on the average exposure level among all short-term market timers the Hulbert Financial Digest monitors, rather than just those who focus on the NASDAQ market. This broader-based sentiment index now stands at 61.7%. That's getting close to its highest level of the year.

To be sure, these two sentiment indexes are not suggesting that we're at "irrational exuberance" levels. But they do suggest that we're closer to that end of the sentiment spectrum than to "blood is running in the streets" skepticism.

Perhaps the best you can say right now is that the sentiment picture is neutral from a contrarian point of view. At worst, it's slightly bearish for stocks.

There's no way of knowing, of course, how much of the stock market's recent strength was being fueled by sentiment. But it is safe to say that, if the recent rally isn't close to being over, it will have to be based on something other than a strong wall of worry.

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