CHAPEL HILL, N.C. (MarketWatch) — The bull market this week received a new lease on life.

That’s the good news.

The not-so-good news is that this new lease is a short-term one.

The source of the good news: The shortest-term and most trigger-happy of market timers we track quickly ran to the exits in the wake of this week’s market turmoil. By doing so, they have gone a long way toward rebuilding the veritable “wall of worry” that bull markets like to climb.

I say “rebuild” because these same market timers were exuberantly bullish not that long ago and therefore, to that extent, were causing the wall of worry to begin crumbling. In mid-June, for example, as I pointed out at the time, these timers had become more bullish than they had been for some time. From its high the day after my June 19 column, until just one week later, the Nasdaq Composite Index COMP, +1.24% dropped 5%.

The Nasdaq-oriented timers I monitor reacted to that quick drop by running for the exits — just as they have done this week. In true contrarian fashion, that set up the sentiment preconditions for a nearly 6% rally over the subsequent couple of weeks.

Consider the average recommended equity exposure among a subset of short-term market timers who focus on the Nasdaq market in particular (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). Since the Nasdaq responds especially quickly to changes in investor mood, and because those timers are themselves quick to shift their recommended exposure levels, the HNNSI is my most sensitive barometer of investor sentiment in the equity market.

Sentiment index

During the week of my June 19 column, the HNNSI got as high as 87.6%, which was higher than 97.5% of all readings since 2000. After the quick 5% drop that followed that high reading, the HNNSI plunged to minus 5.1%.

In the nearly 6% rally that ensued subsequent to that minus 5.1% reading, the HNNSI did not rise to as high a level as it did in mid-June. And, yet, in the wake of this past week’s turmoil, they ran to the exits with just as much fervor as they did in late June and early July. As this is written, the HNNSI stands at minus 2.8%. (See accompanying chart, above.)

This behavior is what’s rebuilding the wall of worry.

Short-termism

One ancillary theme also worth mentioning is how quickly sentiment swings from one extreme to another. When I first began measuring market-timer sentiment several decades ago, it typically took a couple of months for an extreme to be worked off. Now it is taking just a week or two — if that.

That’s why I say that the stock market’s new lease on life is only for the short term. This isn’t to say that the bull market will come to an end at the termination of that lease. It can be renewed, after all. But from a contrarian point of view, such a renewal will depend on the sentiment picture remaining favorable.

Another feature of the current sentiment picture worth noting: Monitored stock market timers who focus on the broader market, as represented by indices such as the Dow Jones Industrial Average DJIA, -0.03% and S&P 500 Index SPX, +0.49% have not been swinging to the extremes as much as the Nasdaq-focused market timers. In fact, the average recommended exposure level among those broad-market timers currently stands at 57% (as measured by the Hulbert Stock Newsletter Sentiment Index) — far higher than the minus 2.8% reading from the Nasdaq-oriented timers.

This suggests that the sentiment winds will be blowing more strongly in coming sessions for the Nasdaq market rather than the broader market. We witnessed the effect of this on both Wednesday and Thursday of this week: In both sessions, the Nasdaq rose markedly while the Dow declined.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.

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