As a seasonal investor, May means a lot. It is when the slower 6 months of the year usually starts for equities. Not all equities show this pattern especially Tech. So is it that the Tech mega caps now make up such a large market value weighting that we see a rising SP500 while the rest of the market slumps.
It’s probably part of the reason.
The total developed world and US market market minus the 50 mega caps fits a seasonal pattern. The surge since last October fits the 4-year Presidential cycle, but not the sideways part.. Maybe the market already covered all the Election year boost by April and then narrowed into a few mega stocks.
Regardless, this is one of the largest divergences in history between a narrow few and the rest of the market and it is triggering all sorts of warnings. “Warnings” because this kind of divergence at these kind of valuations do not just fade away.
Dr. Hussman calls them syndromes and provides us with a few and this is one of the simplest. He tells us that in the last 30 years there have only been 3 times when there are more New York Stock Exchange stocks hitting new lows than those hitting new highs while at a 5-year high in the SP500 and while less than 30% of investment advisors are “bearish”.
Once before the first 2000 market peak and in late 2022 when the SP500 started its 20% decline. It did not happen at the peak of 2007, but it is happening now.
One thing I have noticed about all these different warnings and models. They’ve been going off a lot since 2016. Prior to 2015 they were rare. What happened in 2016? My guess is when were well into the deeply suppressed interest rate phase, liquidity was abundant and their was no fear because the Fed showed they always saved the markets. Also the economy was descent and sentiment was flying high. The market ripped, valuations and risk be damned.
My crash warning indicator today is back to neutral from safe. It’s based on high yield spreads that typically have smarter investors who see problems first and bail. If a recession does appear on the horizon it will start signaling problems. Or if bond investors fear more defaults.
It’s kind of funny how everyone seems to want to see a recession so the Fed will lower interest rates and save the market (real estate is the only one in deep trouble along with the banks who loaned RE money). It does not work that way. If the Fed starts lowering rates because they see problems or more often get hit in the side of their heads with a financial crisis 2×4, then the market has already tanked in reaction.
People just want a lower interest rate for no reason. I doubt they will get that because rates are NOT low. They are normalized.
The stock market is not normalized. Not even close.
Michael Bond
Categories: Perspectives