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In short, recent weeks have seen a strenuously overbought record high in the S&P 500 featuring the most lopsided bullish sentiment (Investor’s Intelligence) since 1987, coupled with increasing divergence and deterioration across a wide range of market internals, including small-capitalization stocks, junk debt, market breadth, and other measures. With compressed risk premiums now joined by indications of increasing risk aversion, we remain concerned that risk premiums will normalize not gradually but in spikes, as is their historical tendency.
Despite our concerns here, there’s no assurance that the present instance will be resolved the same way as similar conditions have been resolved historically. A fresh improvement in market internals would signal an easing of risk aversion or even a resumption of risk-seeking preferences. If that shift occurs following a meaningful retreat in valuations, the combination would represent one of the most constructive investment conditions we identify. So our outlook will shift considerably as the evidence changes. At present, conditions remain unfavorable, and the potential for abrupt and vertical losses should not be taken lightly
In short, recent weeks have seen a strenuously overbought record high in the S&P 500 featuring the most lopsided bullish sentiment (Investor’s Intelligence) since 1987, coupled with increasing divergence and deterioration across a wide range of market internals, including small-capitalization stocks, junk debt, market breadth, and other measures. With compressed risk premiums now joined by indications of increasing risk aversion, we remain concerned that risk premiums will normalize not gradually but in spikes, as is their historical tendency.
Despite our concerns here, there’s no assurance that the present instance will be resolved the same way as similar conditions have been resolved historically. A fresh improvement in market internals would signal an easing of risk aversion or even a resumption of risk-seeking preferences. If that shift occurs following a meaningful retreat in valuations, the combination would represent one of the most constructive investment conditions we identify. So our outlook will shift considerably as the evidence changes. At present, conditions remain unfavorable, and the potential for abrupt and vertical losses should not be taken lightly
