Mar 9, 2022
This Indicator Has Predicted Every Bear Market For The Last 200 Years
What Is It Suggesting Now?
THIS INDICATOR HAS PREDICTED EVERY BEAR MARKET FOR THE LAST 200 YEARS
A characteristic of bull markets for at least the past 200 years has been they have been driven by a relatively small number of issues that often reflect the development of new technologies.
Major examples include, in the 19th century, the development of canals and later, railroads, each led bull markets. The great bull market of the 1920s was led by stocks associated with the new technology of radio, such as RCA. The bull market of the late 1960s-early 70s featured the “Nifty-Fifty,” which was largely composed of conglomerate and tech stocks.
More recently, the great market bubble that peaked at the turn of the century was produced by the enthusiasm generated by the appearance of the internet. The bull market of recent years has been propelled by the so-called “FAANG” stocks plus a small number of other notables such as Microsoft.
In every instance over the past 200 years, the end of every major bull market was preceded by price weakness by its leading stocks.
The accompanying charts paint a disturbing picture because they illustrate that the FAANG stocks have displayed increasingly poor relative performance to the S&P 500. This trend is especially disturbing given that this small band of stocks has contributed over 50% of the S&P 500’s returns in recent years. Moreover, the FAANGs plus Microsoft comprise about a 30% weighting in the S&P 500, meaning that further price weakness on their part will significantly contribute to an already weak S&P 500.
The current relative weakness of the FAANGs suggests that a bear market is highly probable, with the probability rising the longer the underperformance continues. Each new bull market is spearheaded by a fresh group of leaders, which arises after a bear market that is preceded by a weakening of the previous leaders. Such has been the cycle of secular market trends.
While the odds of a bear market are high and rising, there are actions that investors can take to control risk and identify opportunities.
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