S&P 500 Highs Could be Sending Mixed Signals

11/15/2019 9:29 am EST

Focus: STRATEGIES

Landon Whaley

Editor, Gravitational Edge

New all-time highs amid a growth slowing environment often signals weakness, writes Landon Whaley, who provides some examples from the last 30 years.

Everywhere you look these days, equity markets from Brazil to the U.S. are printing brand-new all-time highs. No development exposes our humanness and brings out the FOMO (fear of missing out) more than a new all-time high. But investors should take heed; not every all-time high is created equal.

Mixed Signals

Despite a Fall or Winter Fundamental Gravities for four consecutive quarters (and at least two more growth slowing quarters coming our way), the United States has seen a stampede of growthy markets making all-time highs in recent weeks. Everyone’s favorite benchmark, the S&P 500, has led the charge higher, followed by the Nasdaq, industrials, financials and healthcare stocks, just to name a few.

Growthy markets are hitting all-time highs, and at the same time, we’re seeing equity markets that generally thrive in Fall and Winter Fundamental Gravity, also sitting near their recent highs: REITs, utilities, homebuilders and consumer staples.

Investors are in quite a quandary because U.S. markets that should be getting the woodshed treatment (given the prevailing FG) are breaking to new all-time highs. At the same time, markets that only hit new highs within growth slowing regimes are also busting a move to new highs.  

Are markets sending us mixed signals?

S&P History Lesson

The 30-year history of S&P 500 all-time highs tells us they are a regular occurrence during growth slowing regimes, and it also tells us the most likely outcome once one of these “growth slowing” highs are = achieved:

  • While U.S. growth was slowing in Q3 1990, the S&P 500 peaked at a brand new all-time high of 369.78 before correcting 20.3% over the ensuing six months.
  • The S&P peaked 10 years later at an all-time high of 1552.87 during a Fall FG in Q1 2000 before crashing 50.5% over the following three years. Investors who bought that Q1 2000 high, waited eight years to breakeven as the S&P 500 took until Q4 2007 to make a new high.
  • Speaking of that pre-crisis 2007 high, it occurred amid yet another Fall Fundamental Gravity. The S&P 500 climbed to 1576.09 before getting destroyed over the next six quarters, losing 57.7% in the process.
  • During a growth slowing regime in Q2 2011, the S&P 500 peaked at a lower interim cycle high (not an all-time high) of 1370.58 and then proceeded to drop 21.6% before bottoming on Oct. 4, 2011.
  • Following a three-year rally off that October 2011 floor, everyone’s favorite benchmark hit another brand new all-time high while growth slowed during Q2 2015. The S&P 500 peaked at 2134.72 on May 20, 2015, and then corrected 15.2% before finding its footing six months later.

The pattern here is crystal clear. The new all-time highs over the last 30 years have occurred during growth slowing regimes (specifically a Fall Fundamental Gravity) here in the United States, and those high preceded large corrections (in some cases 50% moves)  in the months that followed.

Since April 29, the S&P 500 has minted a new all-time high on 13 occasions, the most recent being last Thursday’s all-time high of $3,097.77. Each of these highs occurred against a backdrop of growth slowing, just like the events in our history lesson. The U.S. and Global Fundamental Gravity, coupled with the earnings recession that no one is discussing, means there is a large air pocket underneath the current price on the S&P 500.

Check out the potential for a Gann Reversal and possibly the last all-time high for a while.

The Bottom Line

Not all all-time highs are created equal. Chasing all-time highs in the S&P 500 and growthy sectors during Fall carries extreme risk. Don’t be drawn in by the Fast Money folks, and reformed brokers, frothing at the mouth over this latest string of new high or Cramer bulling it up with buzzers and sound effects, “Buy, Buy, Buy!” Keep your head about you (buying bullish U.S. Shift Work and Reflation Elation markets) while everyone else is losing theirs.

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