![]() We don’t take any single divergence as serious in itself, but the accumulation of divergences in recent weeks should not be ignored. Note, for example, that as the S&P 500 pushed to new highs in recent weeks, cumulative advances less declines among NYSE stocks failed to confirm those highs, while junk bond prices were already deteriorating. These divergences have actually been building for months, but rather quietly. We observe these breakdowns in the form of surging credit spreads (junk bond yields versus Treasury yields of similar maturity), weakness in small capitalization stocks, and other measures. Historically-informed investors are being given a hint of advance warning here, in the form of a strenuously overvalued market that now demonstrates a clear breakdown in internals. Taken together, he says, they're bad news. And the advance-decline line has turned down with the rest of the market. Junk bonds have tanked as investors have remembered en masse that companies sometimes default. Even though the S&P 500 is still not far of its all-time high, the Dow is now down for the year. This week, Hussman also points out that those market "internals" he mentions in the paragraph above have started to break down again. But the drop wasn't visible until after stocks had begun to fall. ![]() In 2007, of course, the market plunge was followed by a collapse in corporate earnings. Probably the most important aspect of last week's decline was the decisive negative shift in these measures.” One of the best indications of the speculative willingness of investors is the ‘uniformity’ of positive market action across a broad range of internals. Rather, low and expanding risk premiums are at the root of nearly every abrupt market loss. There is in fact zero correlation between year-over-year changes in earnings and year-over-year changes in the S&P 500. Fundamentals don't have to change overnight. The 1987 crash was associated with no loss in earnings. ![]() The stock market dropped by half in 1973-74 even while S&P 500 earnings grew by over 50%. ![]() There need not be any collapse in earnings for a deep market decline to occur. “Abrupt market weakness is generally the result of low risk premiums being pressed higher. ![]() Account icon An icon in the shape of a person's head and shoulders. ![]()
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