A 10-15% S&P 500 correction may be next — but the bull isn't dead

Hayes Martin, president of the advisory firm Market Extremes, believes a 10% to 15% correction in the S&P 500 is imminent, though he doesn't think the pullback will end the current bull market. The call, relayed in an email this week to MarketWatch columnist Mark Hulbert, hinges on divergences Martin tracks in sentiment and market internals. He warned the correction could run even deeper for the Nasdaq Composite and small-cap stocks, where concentration risk and stretched valuations have drawn the most scrutiny.

Why tops don't look like tops

The prediction lands at a moment that, on the surface, looks anything but bearish. The Dow Jones Industrial Average and the Nasdaq each sit roughly 4% below their all-time highs, while the S&P 500 is less than 2% off its record. The VIX, the CBOE's volatility gauge, is still trading below its long-run average. None of that screams danger — and that's the trap.

Hulbert, whose Hulbert Ratings service audits investment newsletters, argues that bull-market tops are not the mirror opposite of bear-market bottoms. "Bear-market bottoms typically end with a spasm of despair as traders throw in the towel," Hulbert wrote. "Bull-market tops are far more gradual and less dramatic." For anyone trying to time an exit, that asymmetry is a problem.

What the historical record shows

The evidence comes from the calendar of major turning points maintained by Ned Davis Research since 2000. Over the 50 trading days before a bear-market bottom, the S&P 500 has on average dropped sharply. Over the comparable 50-day window before a bull-market top, the index has been largely flat.

Sentiment tells the same story, just inverted. In the run-up to bottoms, short-term market timers have cut their recommended equity exposure by an average of 20 percentage points. In the 50 days before tops, the same group has added less than 4 percentage points. The dominant emotion at peaks, Hulbert wrote, is "exhaustion and even indifference." Many traders, he argues, simply become unenthusiastic.

What does this change for your portfolio?

It changes how you read a quiet tape. If you're waiting for a violent selloff to tell you the bull is over, you'll miss the signal. The more useful tells are sentiment drift and a flat index parked near highs while the news cycle rotates from euphoria to "meh."

That doesn't mean selling now. Martin himself doesn't view a 10%-15% drop as a bull-killer. A pullback in that range, painful as it would feel, leaves the structural uptrend intact in his framework. The signal practitioners should watch isn't the size of the dip. It's whether sentiment and internals keep deteriorating after it.

The fine print

Hulbert calls Martin "one of the most careful market historians I turn to for insight" and disclosed that Market Extremes does not contract with his auditing firm, so the mention isn't a paid plug. Martin's approach leans on extremes in sentiment and market internals to flag early reversals, a different lens than most cable strategists use. When Martin's emails arrive, Hulbert wrote, "I pay attention."

The current setup, both men agree, is consistent with prior tops. That means the tape could resolve with another leg higher, or with a sharp drop in the 10%-15% range that shakes out the latecomers. Either way, the warning isn't the price action. It's the absence of fear.