Stock-market timers recently rushed to the exits, which is bullish from a contrarian perspective

Recent market weakness is not the beginning of a bear market, according to a contrarian analysis of market-timer sentiment.

That's because the stock-market timers ran for the exits in a big way in June and July in the wake of the market's turmoil. That's just the opposite of the stubborn bullishness that is the sentiment hallmark of a bull-market top.

Consider the below chart, which plots the average recommended equity exposure level among short-term stock-market timers who focus on the Nasdaq in particular. (This average is the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI.) Notice the HNNSI's big drop beginning earlier this summer.

From its June 2 high to its July 29 low - a 40-trading-day period - the Nasdaq Composite COMP fell 9.8%. Over this same period, the HNNSI dropped a huge 84.4 percentage points. To contrarians, the market timers are building a robust "wall of worry" that bull markets like to climb.

It might not strike you as particularly surprising that the market timers so quickly ran for the exits in the face of the market's drop. After all, the Nasdaq-100 index NDX QQQ, comprised of the 100 Nasdaq-listed stocks with the largest market capitalizations, fell 11.3% over the same period, thereby satisfying the semiofficial criterion of a correction. Isn't it always the case that market timers build up cash in the face of that big a drop?

"No" is the answer - and according to contrarian analysis, it's a sign of stubbornly held bullishness when they don't. The textbook illustration of this is what happened at the top of the dot-com bubble: In the wake of the Nasdaq Composite's first 10% drop off its March 2000 high, the market timers actually increased their equity exposure level - and we all know what happened subsequently.

A more comprehensive historical comparison is provided by how the HNNSI behaved during all 40-trading-day periods since 2000 in which the Nasdaq Composite fell at least 9.8%. The HNNSI's recent drop of 84.4 percentage points was more extreme than in 79% of those prior cases. Once again, we see that the market timers' recent behavior can hardly be characterized as stubbornly held bullishness.

Contrarians therefore expect the stock market over the near term to rally back toward its all-time high. At that point, they will be paying close attention to how the market timers react to any subsequent weakness. If the timers once again rush for the exits in the wake of that weakness, they will in effect have given the bull market another lease on life. If they instead remain stubbornly bullish in the wake of such weakness, it will suggest that a deeper drop is in store.

Contrarians don't hazard a guess of how it will eventually play out, letting the market tell its story in real time. In the meantime, however, they expect a short-term rally.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert