The good news and the bad news - Part II. The bad news
Key points:
- This is Part II of a two-part series. In Part I, we covered the "Good News" regarding recent indicator developments that appear to bode well for stocks over the next 6 to 12 months
- Here in Part II, we will detail a variety of indicators - mostly of the "breadth" variety - which appear to bode ill for stocks in the next 1 to 6 months
- Here is the important thing to note about the indicators highlighted below: On their own, no single "signal" constitutes an outright "Sell everything" signal. They are all "weight of the evidence" indicators, and the signals highlighted in this note all fall on the unfavorable side of the ledger. What these signals suggest is that the market may move sideways to lower in the months ahead and experience well below average results, and not necessarily that a major bear market is impending
Unfavorable signal #1: S&P 500 Component Correlation
This indicator shows the correlation among members of the S&P 500 index. During times of panic, investors tend to buy or sell "everything" together, no matter their individual merits, so correlation rises. The higher it goes, the more we're seeing group-think, which tends to happen at times of extreme pessimism, and is thus usually a positive for stocks going