No Trend Uniformity
As John Hussman points out in his most recent weekly missive, the stock market currently reflects all the characteristics observed near previous major market peaks. Apart from the more obvious ones, such as overvaluation and lopsidedly bullish sentiment which have been with us for some time, the market's internals continue to deteriorate. This makes the current situation especially dangerous. As Hussman notes:
“When extreme valuations and lopsided bullish sentiment are joined by deterioration in market internals, one faces an environment that couples compressed risk premiums with increasing risk aversion. Throughout history, severe market losses and crashes have nearly always been the result of an upward spike in previously compressed risk premiums.”
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The deterioration in market internals is e.g. evident in new high/new low ratios that are inconsistent with a market making new highs, and a growing divergence between prices and advance/decline statistics. Also, an ever smaller percentage of stocks remains above important moving averages. Below is a chart depicting several of the most widely followed market internals (high/low percent, advance/decline line, S&P 500 stocks above 200 day and 50 day EMA).
What this essentially tells us, is that capitalization-weighted indexes are held up by an ever smaller number of big cap stocks. A the time of writing, a strong short term rebound in the stock market is underway. However, the underlying problems with trend uniformity and internals depicted below remain in place.
A number of important market internals – click to enlarge.
A large proportion of the stocks holding up the cap-weighted indexes are technology stocks, which is actually anadditional warning sign. At the peaks of 1998 (ahead of the Russian/LTCM crisis), 2000 and 2007, a handful of “horsemen” from the technology universe were the very last stocks to make new highs – it seems to happen every time.
A major reason for the deterioration in internals is the economic weakness currently spreading in China, coupled with malinvestment on a grand scale in the commodities sector over previous years. This combination is putting pressure on commodity prices and the energy and materials sectors have entered bear markets as a result. These two sectors together currently represent 15% of the market capitalization of the S&P 500 Index. Transportation stocks have begun to sag as well and have been in a down trend since the end of last year (see “Transportation Sector in Trouble” for details on this).
Lately, the weakness has however spread further, as industrial stocks have begun to join the decline as well. In order to provide an overview, we have picked the six charts below, which show the weakest sectors and the strongest sector (technology) compared to the SPX.
