Prepare for the most significant correction since the bull market started in March 2020. To be sure, on Wall Street, predictions are a penny a dozen. But this one comes from Hayes Martin, the president of Market Extremes, an investing advisory firm. Martin’s work was presented to me several years ago, and I’ve found his predictions of market turning moments to be impressive ever then. (For the record, Martin does not subscribe to an investment newsletter, and my newsletter tracking company does not audit his investment performance.)
Over the previous year, I devoted two pieces to Martin’s predictions, both of which proved to be accurate. “The stock market… is stronger than even the most positive investors believe,” I concluded in May 2020. The market was still “firing on all cylinders” in January of this year, I wrote. Martin remarked in an interview on July 14 that the stock market in the United States isn’t burning on all cylinders right now. Indeed, the market’s internal health is presently worse than it has been since October 2018, he claimed. The S&
(See my Oct. 4, 2018, column for more on Martin’s prediction.) Check out bonds if you think equities and housing are in a bubble. Plus: We’re looking at stocks as money pots, which isn’t going to happen. Martin quickly added that the market’s internal health isn’t as awful as it was in 2018. This time, he expects the major U.S. stock indices to fall by 10% or more. In terms of timing, he thinks the downturn might start at any time, but he expects it to start no later than mid-August. The cause of the market’s ailment Martin’s somber projection is based on growing divergences within the US market, as seen by fewer and fewer firms partaking in the top indices’ headline-grabbing success. The increased number of equities hitting new lows, for example, is one indicator of these divergences. Even while the Nasdaq 100 NDX, -0.71 percent and the S&P 100 OEX, -0.37 percent indexes were making new highs on Wednesday of this week, numerous sectors were making new lows. Small- and mid-cap stocks, as reflected by the Russell 2000 index, were particularly affected. For the second day in a row, there were more new lows than new highs in that index on July 13. What happened this week is only the third time in Martin’s data for the Russell 2000’s new highs and new lows, which dates back to June 2000. It happened in September 2014, July 2015, and October 2018. In all three situations, the S&P 500 and Russell 2000 were at least 10% down three months later. According to Martin, the S&P 500, which is dominated by large companies, is the only part of the market that is not now seeing severe divergences. He claims that the “stock market’s present internals are some of the worst I’ve seen in decades” except for that sector. These extreme divergences are occurring because equities are excessively overvalued, with certain stocks in bubble territory, according to Martin. This means that if the market falls, it will most likely fall further than it would otherwise. The current over-bullish investment mentality, he continued, is adding gasoline to the fire. As contrarians point out, such extremes in mood indicate that the market’s path of least resistance is down. To be sure, markets have been overvalued for a long time, and optimistic sentiment has been at or near extremes, according to Martin. Market divergences were the missing piece. That component has now been installed. Mark Hulbert contributes to MarketWatch on a regular basis. His Hulbert Ratings keeps track of financial newsletters that pay a set price to have their portfolios audited. His email address is mark@hulbertratings.com. More: According to strategists, Apple, Amazon, ARKK, and other prominent names imply a market downturn is on the way. This is why. Plus, this one indication suggests that a stock market drop is imminent./n
