Market peaks tend to be a process rather than an event, and these processes tend to involve a decline in the share of individual stocks participating in the rally, as well as signs of weakness across other measures of risk appetite. We have highlighted the deterioration in the uniformity of the market advance on numerous occasions over recent months, and we continue to see compelling signs that a major bull market peak is occurring.

Signs Of Declining Market Uniformity Mount

As we noted on July 14 (see “

Source: Bloomberg

Last week saw the SPX post new recovery rally highs, closing the gap left in late February when the market gapped lower due to the initial COVID-19 outbreak. Despite the recovery in the market capitalization-weighted index, the equally-weighted SPW index failed follow suit, unable to overcome its June 8 high. This is important, as a similar pattern occurred in February (see “Bearish Divergences Warn Of A Major Top”), as well as the major market peaks of 2000 and 2007.

Ongoing divergence between SPX and SPW

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Source: Bloomberg

The failure of the VIX to extend its downtrend is another signal of declining risk appetite. The so-called fear gauge, which has shown a strong tendency to bottom out before the SPX itself peaks, failed to drop below the June 5 low last week. This chimes with the fact that the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) also failed to post new recovery highs last week, as did the Dow Jones Industrial Average.

Risk-Reward Profile Extremely Negative

We are often asked whether we think the advance from the March low is a bear market rally or whether we expect to see new highs. Given the growing number of bearish divergences as explained above, and the fact that the February 24 gap has now been filled, we are tempted to argue that we are in a bear market rally.

However, with the SPX sitting just 5% from its all-time high, we have to say that a new high is certainly possible. Our conviction is not necessarily that U.S. stocks will decline imminently, but that the risk-reward profile is extremely negative over every single time horizon we look at. While we cannot rule out a marginal new high, the combination of waning market breadth, bullish speculative sentiment, weakening economic fundamentals, extreme market valuations, and growing inflation pressures suggests that any further gains will be given back with a vengeance.

Disclosure: I am/we are short NDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.