Greedy stock investors are starting to show signs of irrational exuberance

The mood on Wall Street has shifted from fear to greed. And, like clockwork, contrarian-minded investors have shifted their short-term outlook in precisely the opposite direction, from positive to negative.

To appreciate how big a mood shift has taken place, consider where sentiment stood in early August, which was the last time I devoted a column to a contrarian analysis of sentiment. I reported then that stock-market timers were running for the exits, which in turn gave the bull market “a new lease on life.”

Since then, the S&P 500 SPX, +0.03%  has gained close to 3%, taking this U.S. market benchmark to a new bull-market high, surpassing its previous high set in late January.

Today, in contrast, the majority of stock market timers are on the bullish bandwagon, reflecting an underlying enthusiasm if not outright exuberance. That is why contrarians now believe that the market will be heading down.

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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.

This average currently stands at 64.9%, having risen in recent sessions to as high as 70.1%. On the occasion of my early-August column on stock market sentiment, in contrast, this average stood at minus 2.7%. This represents a significant shift towards irrational exuberance.

The current stock market mood is more akin to the ‘slope of hope’ the market descends.


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