Only a Modest Market Correction Is Ahead

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April 11, 2012, 12:01 a.m. EDT

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” Might the stock market be embarking on a 10% or more correction, just as it did in April of each of the last two years?

I doubt it. The sentiment data suggest that the correction that began earlier this month is going to be more modest.

Consider the average recommended stock market exposure among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). On April 2, the day of the bull market high, this average stood at 42.1% "” which is no where near as high as where it stood at the stock market's peaks in either of the previous two Aprils.

In fact, as you can see from the accompanying table, the HSNSI at the April 2010 bull market peak was 23 percentage points higher than where it stood on April 2. And at the April 2011 peak this average was 25 percentage points higher.

This contrast is significant, according to contrarian analysis, as it suggests that the recent bull market peak was not accompanied by the excessive levels of enthusiasm and euphoria that were seen as the market began its major corrections in each of the two previous Aprils.

Stocks ended with their steepest declines of the year, as worries over rising borrowing costs for European countries weighed on investor sentiment ahead of the start of earnings season.

The accompanying table also shows where the HSNSI stood on the fifth day of each of these three corrections. Notice that the HSNSI has dropped far more over the last week than it did on the occasion of each of those prior two corrections.

This is also telling, according to contrarians, because a hallmark of more major market tops is stubbornly-held bullishness. There would appear to be a lot less of that stubbornness in the current situation than in either of the previous two Aprils.

None of this is to suggest that the current stock market correction has run its course. On the contrary, I have been interpreting the sentiment data for several weeks now as indicating that the market is ripe for some sort of a correction. ( Read my Mar. 23 column, "Market's long awaited correction at hand." )

And in the case of most other corrections of the last couple of years, the final bottom didn't occur until the HSNSI was markedly lower than where it stands now. In many cases, in fact, the HSNSI at the corrections' bottom was in negative territory.

What this means, in my opinion: The market's correction has further to go, but it's unlikely to drop as far as it did in the case of either of the corrections that began in April 2010 or April 2011.

Click here to learn more about the Hulbert Financial Digest.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse

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