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Market timers have reacted to the stock market's recent selloff with a big yawn.

And that's a serious cause for contrarian concern, since it means that a sentiment foundation doesn't yet exist that could support a rally worth betting on.

Consider the average recommended stock market exposure level among the short-term timers I monitor, as measured by the Hulbert Stock Newsletter Sentiment Index (or HSNSI). This average currently stands at 46.3%. Though that is 32 percentage points lower than the reading that accompanied the Dow Jones Industrial Average's Apr. 23 high, it still is higher than two-thirds of all other daily readings since 2000. 

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(Full disclosure: A division of my company calculates the HSNSI and offers the data by subscription.)

This shows how exuberant the market timing community was a few weeks ago. And it furthermore suggests that the average market timer is not yet taking seriously the market's 1300-drop.

This is well illustrated by how begrudgingly the HSNSI fell in the wake of the Dow's triple-digit drops of the past three weeks.

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# Dow points lost

Percentage points decline in HSNSI for the day

Apr. 25



May 1



May 2



May 7



May 9



May 13



Notice from the table that, but for the 20.63 percentage point drop in Monday of this week, the HSNSI barely budged in the wake of the previous five triple-digit Dow losses. This is a textbook illustration of what contrarians often refer to as the "slope of hope" that markets like to descend.

Such slopes, of course, are just the opposite of the "Walls of Worry" that bull markets like to climb.

This unfavorable sentiment environment doesn't mean that the stock market can't rally. But because any such rally would be built on a shaky sentiment foundation, it would carry above-average risk.

Contrarian analysts choose instead to bet on those rallies that begin when the average market timer is extremely bearish. The last time that occurred was in December, as you can see from the chart above. Contrarians therefore were not particularly surprised by the strength of the market's recovery in early 2019. Nor were they surprised that, given how slowly the prevailing mood shifted towards the bullish extreme end of the spectrum, the rally lasted longer and went further than most expected.

We have a long way to go to return to the bearish sentiment extremes seen last December. We could get there soon, assuming that market timers soon decide to throw in the towel. But if they instead continue to give the bull the benefit of the doubt, the stock market could be in for several more weeks of losses.

One virtue of contrarian analysis is that you don't need to guess in advance which of these possibilities comes to pass. The market will tell its story in its own time, and contrarians will simply wait until they get the fat pitch of extreme bearish sentiment.

Stay tuned.