Think The Market Will Reach A New High? Here’s Why We Don’t

Stocks are once again rallying after another “mini crash” at the start of the year. We’ve had three of these things since October 2014 without much to show for it. As Adam warned Boom & Bust readers earlier this week, stocks have basically gone nowhere for a year and a half.

After the first crash in late 2014, stocks were able to eke out a new high into May of last year. But since then, stocks have failed to make new highs despite strong attempts like this one.

Ten months without a new high.

That’s only happened at 11 other points in history. And in eight of those instances, we saw a new bear market follow. That’s almost 75%! Even after the 20% correction in 2011, the only major correction in this bubble since March of 2009, stocks hit new highs within 10 months. We’re moving into dangerous territory here.

Two weeks ago I referred to this as a “rounded top pattern,” and we’re testing that trend line which should peak in the 2,070-2,095 area on the S&P 500. If it breaks that level, then a new high would be imminent.

But here’s why I think that’s unlikely…

Coming into the May top and more-so since, small cap stocks have clearly underperformed large caps.

That is the classic sign of a major top!

The dumb money continues to pour in, buying well-known large caps… while the smart money exits after having focused on buying the broader universe of small caps where there is much more opportunity. Your typical investor doesn’t have the sophistication to play that market.

But while they may be able to find some good opportunities in this area… the small caps as a whole have already entered bear market territory, and have no chance of hitting new highs! And that drags on the broader market.

Earlier this year I pointed out the equally weighted Value Line index, which showed the typical stock had already turned bearish. While the S&P 500 was down 15%, this “typical stock” was down 23%, and the small caps were down 27%.