Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

US Stock Market – Internal Weakness Persists

Page 1 of 5

An Impressive Rebound, but Hollow Inside

In his recent weekly market update, John Hussman once again discusses his main bearish argument, namely the combination of market overvaluation and deteriorating internals. He rightly (in our opinion) regards the latter as a signal indicating a shift in risk appetites. Here are two quotes from the article summarizing the essential points:

“Valuations are the primary driver of long-term returns, and the risk-preferences of investors — as conveyed by the uniformity or divergence of market action across a broad range of individual stocks, industries, sectors and security types (including credit) — drive returns over shorter portions of the market cycle.”


“The combination of extreme valuations on historically reliable measures, the deterioration of market internals following an extended period of overvalued, overbought, overbullish conditions, and the weakening of leading economic measures, particularly on measures of new orders and order backlogs, has clear precedents historically, and those precedents are uniformly bad.”

leakImage via

We would add to this that while it is true that the precedents with similar combinations of factors are uniformly bad, there are always different lead times involved before cap-weighted indexes actually peak. These moves toward the eventual top can have blow-off-like characteristics, such as in 1929 (when stocks like RCA and other “story stocks” of the time rose to a frantic peak while the larger list of stocks was already weakening), 1973 (the “nifty fifty” era) or more recently, the year 2000 blow-off in technology stocks. The latter event was highly unusual in terms of size and speed, but it shows what can happen.

However, even if we assume that in today’s case the lead time will be larger than usual (and a blow-off will happen and thus be of a size that will be greater than average), it would only tell us – again based on historical precedent – that the subsequent losses will be all the more devastating (e.g., what happened subsequently to the year 2000 blow-off was a more than 80% decline in the Nasdaq; the 1929 blow-off in the DJIA was followed by a 90% wipe-out). Unless that is, if central banks decide to go “Zimbabwe” on us (we don’t assume that they will, but if they did, one could probably sell a big position in, say, NFLX for $10,000/share one day, and to paraphrase Kyle Bass “buy three eggs with the proceeds”).

Currently, the cap-weighted indexes as well as the Dow Jones Industrial Average are in fact already supported by blow-off like rallies in several of the stocks that have the biggest influence on the indexes either due to their capitalization weighting or their price weighting (GOOG, AMZN, MCD, etc.).

Page 1 of 5