![]() Though our most reliable measures of market valuations presently exceed levels observed at both the 19 market peaks, there's no assurance the current "V" - at this point, only the left side of a "V" - is the peak of a cyclical bull market. The final bull market advances that preceded the 1972-2009 collapses were a bit less steep, so they aren't included among these episodes. These instances cluster into 9 previous episodes across history: August 1929 (precise bull peak), August 1987 (precise bull peak), March 1998 (which was rather uneventful, but still associated with a correction of more than 12% from March levels by late-August), March 2000 (precise bull peak), April 2010 (which was followed by an unmemorable 16% correction into early-July), February 2011 (another unmemorable one, though also followed by a 16% correction by October), January 2018 (followed by a very quick 10% correction), late-August/early-September 2020 (followed by a very quick 10% correction), and today. This time may be different, but even the instances in the past couple of years have been unfavorable. That's the advancing side of a "V," and while that combination has only sometimes marked a bull market top from a full-cycle perspective, it has never been good from an intermediate-term perspective. There are only a handful of times when we've observed "overvalued, overbought, overbullish" syndromes that were also sufficiently frantic to drive the S&P 500 more than 10% above its 10-week low, and 10% above its 40-week average. Instead, the equity components shifted only after a sharp, near-vertical initial loss.Įven without the negative shift in our measures of market internals last week, we've been on high alert. I often describe unfavorable shifts in market internals as being driven by "deterioration" and "divergence." In 19, the ascent to the bull market peak was so steep and indiscriminate that there was little "divergence" in the equity components at the highs. That shift was a bit surprising, because it was driven by components that capture market behavior across "debt securities of varying creditworthiness." Interestingly, those debt-sensitive components were also the first to shift negative at the 19 peaks. While sufficiently extreme conditions can still hold us to a neutral market outlook, the shift to a bearish outlook requires deterioration or divergence in our measures of market internals, which are our most reliable gauge of whether investor psychology is inclined toward speculation or toward risk-aversion.Ī week ago, our primary measures of market internals shifted to a negative condition. So, we've become content to gauge the presence of speculation or risk-aversion, without immediately becoming bearish once speculation has become outrageous. It's just that historically reliable "limits" haven't been effective in recent years. But as we saw as recently as March, the market can still suffer significant losses during periods of risk-aversion, when the speculative bit drops out of investors' teeth. In late-2017, I abandoned my bearish response to those syndromes, along with my belief that reliable "limits" to the recklessness of Wall Street still exist. Still, the collapse of a speculative bubble can be curiously unsatisfying (as it was for me during the 09 collapses) if one happens to care about the well-being of others.Īs I've often discussed, the only aspect of the recent speculative bubble that was truly "different" from other market cycles across history was this: even extreme syndromes of "overvalued, overbought, overbullish" market conditions failed to signal a reliable "limit" to speculation. For historically-informed, value-conscious investors, it's typically a period of annoyance, bordering on contempt, for what Galbraith called "the extreme brevity of the financial memory" - often followed by opportunity and even vindication. For passive investors, it can be a period of exhilaration followed by panic. The speculative "V" is one of the most interesting and challenging features of the market cycle. An increase in divergence or general weakness across individual stocks, industries, sectors, or security-types (including debt securities of varying creditworthiness) would shift market conditions to a combination of extreme valuations and unfavorable internals, and open up the sort of 'trap door' situation that we observed in March. That's why sufficiently overextended conditions can hold us to a neutral stance even in some periods when our measures of market internals are constructive. The problem is that this has also often been true at the very peak of 'V' tops like 19. It's essential to monitor the uniformity of market internals, because investors still have the speculative bit in their teeth.
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