Where have all the bears gone?
Commentary: The bulls recently have come out of the woodwork

By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) — Wall of worry? That was so “last week.”

Recent sessions have witnessed such a mad rush to jump on the bullish bandwagon that the wall of worry is in danger of crumbling.

Consider the average recommended equity exposure among a subset of the shortest-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). When I last devoted a column to stock market sentiment, in late March, this average stood at 15.8%. ( Read my Mar. 22 column. )

By earlier this week, in contrast, the HSNSI had risen to 58.8%, or 43 percentage points higher. That represents a rapid increase in bullish sentiment in a very short time.

This increase has been even more evident among market timers who focus on just the Nasdaq market — an arena that is particularly sensitive to changes in the way the wind blows. The Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI, stood at minus 41.7% on the date of my late March column about stock market sentiment.

By earlier this week, the HNNSI had risen to plus 46.7%, representing a nearly 90-percentage-point increase in just a couple weeks’ time.

Such rushes to jump on the bullish bandwagon are an ominous sign, according to contrarian analysis. It suggests, at a minimum, that the bulls need to pull back somewhat before the rally can continue.

The most likely vehicle for such a retreat of the bulls would be a market correction — a decline that appears to have begun on Tuesday, when the Dow Jones Industrial dropped 118 points. Especially if this decline lasts for longer than just a day or two, it will be crucial to see how the bulls respond.

If they stubbornly hold on to their new-found bullishness, or only begrudgingly reduce their equity exposure, contrarians would bet that an even deeper decline is necessary in order to re-establish a strong wall of worry.

The most bullish scenario, from a contrarian point of view, would be for the newly minted bulls to as quickly jump off the bullish bandwagon as they recently have jumped on it. That would suggest that the wall of worry from March has not permanently crumbled — but merely gone into hiding.

We’ll know soon enough