Another Huge Flag: S&P 500 returns are signalling markets are at a very critical stage
We all know that the treasury market and global bonds as well are spiraling out of control. Of course, extreme bond swings in either direction also influence the stock market, or one could argue that maybe it is the other way around. Regardless, bonds selling off(or bond yields soaring) does not bode well for stocks.
However, I want to talk about another signal from the stock market that comes directly from the stock market. First, we clear up some terms for the sake of newbies. There's the common (market-cap) weighted S&P index and the equal weight S&P. The market-cap weighted S&P index is based on, well, market-cap size. And as many of us know, the equal weight S&P is an index where every company in the index is assigned the same weight. For example, in a market cap weight S&P Alphabet(GOOGL) would influence the index just the same as Fair Isaac Corporation(FICO). Currently though in the more common market cap weighted, GOOGL influence the index around 260X compared to FICO.
With the background out of the way I want to talk market returns and what that means(or might mean). The S&P (market cap weighted) is currently 2% below its one year high. The S&P equal weight is 5% below its one year high. The seasoned investors might know more the the significance of the 1 year period. Actually, right behind your 50MA, 100MA, and 200MA is your roughly 350 day MA works close enough to the 365 days in a year. But I digress.
The market cap weighted(MC) and equal weighted(EW) S&P indices have given these signals before very critical market junctures in the past 6 years or so.
1. (08/2020) At the start of the 2020 bull market *just after* recovering from the Covid crash losses - \~**49% gains to January 2022**
2. (06/2023) Before the 2023 mid-year correction - **\~ -9.5% loss through October 2023**
3. (11/2023) After the 2023 mid-year correction - **\~ 43% gains through November 2024**
4. (12/2024) **Just before the 2025 bear market - \~-19% loss through end of (30) March**
**And we have just received another one of these signals very recently.**
Perhaps on its one this signal may not mean much to people but considering inflation, energy markets and bonds, I don't think it should be shrugged off at all. I will admit I have been a bit generous with the returns(which is why I tried to include dates) as you'd had have to sold fairly opportunistically to get those returns but even if you only bagged (or lost) 25% of any of those numbers it would still be massive.
In terms of specific names, the signal is pretty market-general. Moving/popular names like NVDA and LLY continue to do very well and outperform in the bull moves. Stocks in a bad macro environment like MDNA post-Covid do poorly in a correction/bear market.
Credit for this insight to Bluekurtic Markets on twitter. I didn't figure this out.