The U.S. stock market kicks off the second half of 2016 facing a huge Wall of Worry. And that’s bullish. In fact, one stock market sentiment index is now in the vicinity of the extremely low levels that, in the past, preceded sizeable rallies. Consider the average recommended equity exposure among a subset of short-term Nasdaq-oriented stock-market timers monitored by the Hulbert Financial Digest (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. This average currently stands at minus 55.6%, which means the average Nasdaq-oriented stock market timer is allocating more than half of his short-term equity trading portfolio to going short. That is an aggressive bet that the market will keep declining. As you can see from the chart above, the HNNSI just recently was quite a bit higher. On June 9 it stood at +73.5%. That means in just three weeks the average recommended equity exposure has fallen 129 percentage points. That’s an extraordinary drop in such a short period. Further evidence of how bearish the market-timing community is: Since Monday, the day of the post-Brexit correction low, the HNNSI has fallen an additional eight percentage points — even while the market staged a powerful rally. That’s not the kind of sentiment behavior typically seen at major market tops. To put recent experience in context, contrast this with how the HNNSI reacted in early 2000 to the bursting of the internet bubble. In the first two weeks, the Nasdaq Composite Index COMP, +0.41% fell by more than 10% — enough to satisfy the semi-official definition of a correction. Yet, far from falling, the HNNSI over those two weeks jumped by more than 30 percentage points. Instead of running scared, in other words, the average short-term market timer considered the correction to be a buying opportunity. That’s stubbornly held bullishness — and we all know what happened next. What we’re experiencing now, in contrast, is precisely the opposite: Stubbornly held bearishness. And this, from a contrarian point of view, is bullish. The usual qualifications apply, of course: Sentiment is not the only determining factor, and even when it’s on target, contrarian analysis is of only shorter-term significance — perhaps the next several weeks to a couple of months, at most. At least for the near-term, however, the sentiment winds will be blowing in the direction of higher stock prices.

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