A Bearish Market Warning From The Tech Bubble Is Back

Authored by @pattidomm via CNBC.com,

Stocks are moving out of step with each other the most they have since just before the end of the tech bubble, and with stock valuations at a high, that could be a warning.

In January 2001, before tech went bust, stocks diverged as growth flourished. Everything named dotcom boomed, but old line industries puttered.

There hasn’t been such a divergence between stocks in the overall market since then, not even during the Great Recession.

The current market’s low correlation comes as valuations soar. At 22, as measured by the trailing price-to-earnings multiple, valuations are higher than they’ve been 84 percent of the time since 1952.

“Correlation is at one of the lowest levels in the post-War era,” said James Paulsen, chief investment strategist at Leuthold Group. “The combination is damaging. We now have record low correlation at the same time we have high valuations, and the combination is bad for the market.”

“When you have this situation of the lowest quintile correlation against the highest quintile valuation since 1952, you have 10 percent declines on average,” said Paulsen.

The aging bull market, Fed policy changes and the trade wars, which have resulted in weakness in stocks of multinational companies and strength in domestic-oriented names, are all potential factors behind the fall in correlations.

He said that, alone, low correlations and high valuations do not necessarily spell trouble, but the combination has been a negative warning for the market. While the bull market could even continue for a few more years, the correlation and valuation extremes suggest a period of turbulence, he said.

Paulsen studied correlation, using 48 sectors that include a broad universe of stocks that went well beyond the S&P 500. He charted the past 24-month rolling-average correlation of returns from the 48 industry sectors to the return of the overall stock market since 1952.

Paulsen said correlation may reflect Fed policy actions, like now. During periods of easy money, liquidity increases and interest rates fall, sending stocks higher across the board. But when the Fed is tightening, liquidity is restricted, yields rise and more stocks are left “impaired,” as correlation declines. For instance, Fed rate hikes might be bad for some sectors, like housing, but good for others, like banking.

“Trade wars have played a role,” he also said. Basic materials, industrials and emerging markets have all taken a hit in recent months, but tech has not been as affected, and small caps have been boosted because of their domestic focus.

Paulsen said correlation is also a proxy for market breadth. High correlation implies all stocks are moving in tandem, with broad participation. Low correlation means more stocks are falling behind. Correlations often decline, or become looser, as a bull market matures and investors are more confident and able to discriminate between names and sectors.

Correlation can become high again during periods of investor panic or bear markets, when all stocks get sold. When investors get fearful, they shift focus from individual stocks to asset classes, pushing correlations higher.

Comments

Clock Crasher Thu, 08/09/2018 - 11:48 Permalink

We are in the opening stages of hyperinflation.  

Wait until the dollar drifts back into the 80's next year.   

Dow 30,000 for starters.  Amazon will be in the 2,000s.  

Silver making its way back to $5

Endgame Napoleon JibjeResearch Thu, 08/09/2018 - 14:41 Permalink

The top 20% of dual-high-earner salaried parents, the top 1% business class and the citizens and noncitizens at all income levels who are womb productive are the ONLY people in Western countries who count in the economy. They are the only groups represented by governent, albeit the top 1% donor class controls everything and is represented the most. The womb-productive / welfare-eligible servants of all nationalities—the group that can work cheaply for the 1% due to their pay-per-birth freebies from .gov—are probably next in line for government protection. In the case of a financial calamity, everyone else best prepare to duck in various ways. Dual-earner parents with other assets and two incomes in a family-centric / crony-parent labor market, losing just extra stock money, are in a much less precarious position than individuals with no crony-parent job advantages in the “voted-best-for-moms” labor market, no assets, no extra money, one income steam and far less job security than the many above-firing working parents. 

In reply to by JibjeResearch

The Real Tony JibjeResearch Thu, 08/09/2018 - 16:27 Permalink

The pension funds have been EXITING the market for the PAST 9 years. That's why they're BROKE. They actually thought he stock market was supposed to relate to the world economies or the American economies all of which have fallen off the edge of the abyss the last 9 years. The pension funds can at least say win or lose they did the right thing based on fundamentals.

In reply to by JibjeResearch

Endgame Napoleon Sonny Brakes Thu, 08/09/2018 - 14:48 Permalink

Maybe, they can start FANG trading with anon sites, like ZHedge, making them public companies. ZHedge has a large workforce of Tylers—2 or 3, anyway. This would also add some stimulus, with all the Tylers spending their proceeds to boost the national consumption numbers. Are any of the Tylers pregnant? If this is not linked somehow to the concept of boosting working moms, Dem and Republican Uniparty members will stand in the way.

In reply to by Sonny Brakes

BANKERS-WE ARE… Thu, 08/09/2018 - 12:32 Permalink

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653 DAYS.
Bitcoin Block Reward Halving Countdown. Google it.  
Just a friendly reminder for the NEWBS.
When you sell your bitcoin, you are selling it to a whale, or even worse, A BANKSTER.
 Never before in the world of finance has a predetermined event of this magnitude happened. It could be the GREATEST FINANCIAL EVENT EVER TO TAKE PLACE. A Known/Known event.
 The WHALES know this and are getting coin cheap right now. Organized theft from weak hands.
Don't sell your bitcoin cheap.
  HODL MOON LAMBO
  JC

user2011 Thu, 08/09/2018 - 13:36 Permalink

They need energy to push the market up. So, they will keep sending out messages like this so more people short the market. It is a sign of anoher short squeeze coming. The best way is to keep your money out of the market. Don't long , don't short, just stay out of it.

Blankfuck Thu, 08/09/2018 - 17:32 Permalink

What? NO WORRY!

THE FED RESERVE FUCKTARTS WILL BAIL THOSE POOR TEKKIES AND FARTBOOKER FANS OUT--ALWAYS!

LIBTARTS IN CALIFORNIA SILICONE BRAIN VALLEY PREVAILS! 

THEY CAN KEEP UP WITH PAYMENTS AND PAY OFF THEIR YACHTS, MANY MANSIONS, MISTRESSES AND MOR! MOR! MOR!

GRATIS AND PAID OFF  BY THE POOR SLAVE WORKING MAN WOMAN, CHILD OF THE USSA UNTIL THEIR DEATH!

FED RESERVE FUCKTARTS WIN! BANKERS AND CEOS WIN!

PRINT DAT PONZI FOREVER