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Prepare for the most severe correction since the bull market started in March 2020.
Granted, the predictions are a dime a dozen on Wall Street. But this one comes from Hayes Martin, president of investment advisory firm Market Extremes. I was introduced to Martin’s work several years ago and since then I have found his predictions of market turning points impressive. (For the record: Martin does not have an investment newsletter; my newsletter tracking company does not audit its investment performance.)
I have devoted two columns to Martin’s predictions over the past year, and both have proven prescient. In May 2020, I concluded that “the stock market… is stronger than even the most optimistic investors believe”. In January of this year, I wrote that the market “is still going strong”.
In an interview on July 14, Martin said that the US stock market today is certainly not running at full capacity. In fact, he said, the internal health of the market is now worse than at any time since October 2018. It was the start of a 20% drop in the S&P 500 SPX,
and a 26% drop in the RUT Russell 2000 Small Cap Index,
(Martin also anticipated this drop; see my column for October 4, 2018.)
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Martin was quick to add that the internal health of the market is not as bad today as it was in 2018. This time around, he predicts a decline of 10% or more for major indices. American scholarship holders. As for the timing, he says the drop could start at any time, but he expects it to start no later than mid-August.
The source of poor market health
Martin is basing his sobering forecast on the growing divergences in the US market, as shown by fewer and fewer stocks participating in the media strength of the major indices. One indicator of these divergences is the increasing number of stocks hitting new lows, for example. On Wednesday of this week, for example, even as the Nasdaq 100 NDX,
and the S&P 100 OEX,
indices were reaching new highs, many sectors were registering a plurality of new lows.
This was particularly evident in the small and mid-cap sectors, as represented by the Russell 2000 Index. On July 13, there were more new lows than new highs in this index for the second day in a row. In Martin’s data for the new highs and lows of the Russell 2000, dating back to June 2000, what happened this week only happened three more times – in September 2014, July 2015 and October 2018 In all three cases, three months later, both the S&P 500 and the Russell 2000 were at least 10% lower.
Martin reports that the only area of the market that isn’t showing dangerous divergences right now is the large-cap-dominated S&P 500. With the exception of this sector, he says that “the current stock market interns are some of the worst I’ve seen in decades. “
Martin added that these serious divergences occur as stocks are severely overvalued – with some stocks in bubble territory. This means that when the market goes down, it is likely to go down more than it would otherwise.
The overly optimistic investor sentiment that prevails at the moment adds fuel to the fire, he continued. As opponents remind us, such sentiment extremes mean that the path of least resistance for the market is down.
Certainly, Martin concluded, stocks have been overvalued for some time now and bullish sentiment is near or near extremes. The missing piece was the market divergences. This piece is now in place.
Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment bulletins that pay a fixed fee to be audited. He can be contacted at [email protected]
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