The market decline over the past several weeks has displayed unusual characteristics that warrant serious attention from investors. Unlike typical corrections, this downturn lacks a critical element: sustained relief rallies.
Unusual Selling Pressure
What distinguishes this market drop from ordinary pullbacks is the absence of multi-day rallies. While we've seen intraday bounces attempt to reverse the downtrend, these efforts have consistently failed by the next trading session. This pattern of relentless selling pressure without meaningful respite raises significant concerns about underlying market strength.
Critical Signals Flashing Warning Signs
Several key metrics and indicators suggest this may not be a routine correction but potentially the early stages of a more substantial bear market:
Stretched Valuations
The U.S. stock market valuation metrics remain extremely elevated compared to historical averages. Price-to-earnings ratios, price-to-sales ratios, and other fundamental measures suggest the market may need further correction to return to sustainable levels. These extended valuations provide limited cushion against disappointing economic or earnings data.
Deteriorating Breadth Indicators
Market breadth measures the participation of individual stocks in market movements. Current breadth readings show narrowing participation in rallies while expanding participation in declines – a classic sign of deteriorating market health. When fewer stocks participate in upward movements, it signals weakening market internals that often precede major downturns.
Elevated Household Exposure
U.S. household exposure to equities remains near historical highs. When retail investors are overexposed to stocks, the market becomes vulnerable to cascading sell-offs should sentiment suddenly shift. This high allocation to equities has historically served as a contrarian indicator before significant market declines.
Bearish Technical Formations
The price action has formed several concerning technical patterns across major indices. Key support levels have been breached, moving averages are crossing downward, and momentum indicators continue to deteriorate. The Nasdaq chart formed a large monthly Bearish Divergence pattern (see below). These technical developments suggest institutional capital may be repositioning for a more significant downturn.
Nasdasq and TSI
Historical data
The NDX closed below its 200d MA several days ago. Based on the historical data, every time NDX lost its 200d MA after an extended run and suffered at least a -3.5% drawdown within the next 2 weeks, it led to a bear market.
We got a -5.7% drawdown and it is less than 2 weeks...
Nasdaq and 200d MA
