Nothing Matters (*Except Everything).

Modern history and its lessons on persistent Stock Market deterioration.

A lot has been said recently about the deteriorating conditions in the U.S. Stock Market.

I’ve steered clear of this topic until now — mostly because I didn’t think it was worth getting into — but it’s time to finally put some thoughts on paper, and share some of my work for reference.

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For most of 2024, the weakness spreading under the surface of the stock market hasn’t mattered, as the main U.S. Indexes continue to make new highs, carried by the big Tech & AI winners of this Bull Market.

*Note that when I say the “main” Indexes continue to make new highs, I’m referring to the S&P and NDX almost exclusively — as nearly everything else topped weeks if not months ago.

Here’s a quick reference of everything that’s potentially topped so far — and it’s not a small list:

DEC 14 — S&P Real Estate

FEB 12 — Dow Transports

MAR 28 — S&P Equal Weight, S&P Midcap 400, Russell 2000, S&P Health Care

APR 4 — S&P Industrials, S&P Materials

APR 12 — S&P Energy

MAY 15 — S&P Smallcap 600

MAY 16 — S&P Consumer Staples, S&P Utilities

MAY 17 — S&P Financials

MAY 20 — Dow Jones Industrial Average, NYSE Index

*The vast majority of Stocks are represented by these Indexes and Sectors.

*Note this list also includes 8 of the 11 main S&P sectors. All topped 2-3 months ago, on average.

*Even within the S&P 500, 80% of members are underperforming the index YTD, and 41% are trading in the red this year. This is despite the S&P already gaining nearly 17% in just over six months.

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I’ve said this before and will say it again — it’s unnecessary (and not my objective) to “call a Top” in Stocks.

Here are a few important reasons why:

(1) Not all Stocks turn at the same time. As a private investor and portfolio manager, my job is to look for signs of weakness in a rising market, and signs of strength in a falling market, in order to assess opportunities at the margin, and allocate capital. Weak Stocks & Groups which are rolling over into potential new downtrends, are what I consider to be classic Shorts. It is far more efficient to Short downside leaders, than Indexes in uptrends. Especially when markets approach a bigger Top — the weak areas tend to lead lower for months, providing far more alpha to the downside, and almost always with less headaches.

(*Some examples of downside leaders: Mortgage Insurers & Homebuilders in 2005-2006, European Banks in 2011, Energy Stocks & Emerging Markets in 2014-2015, Energy Stocks in 2020 — something always breaks first, before the core market takes notice).

(2) Blowoffs in the few remaining lead Indexes can and often do occur near the end of a major rally. The S&P will keep charging, that’s what it does — until every cynic is converted or removed.

(3) When the few remaining lead Indexes form their final Top, most Stocks are already in significant drawdowns from their respective peaks (a whopping 10-30% loss on average), and the vast majority of portfolios and funds are underwater. Only passive index investors, and traders overweight the few remaining high-beta / high-momentum “story Stocks” are still making any money.

With this in mind, let’s look to modern history and its lessons on persistent Stock Market deterioration:

• How far can this go?

• How far did it go in the past?

• What were the consequences?

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My concerns begin here: