As of Friday, the S&P 500 was at about the same level as at the end of February. I noted then that our estimate of potential market losses over an 18-month window was in the worst 1.5% of historical observations. More recently, we've observed a marked deterioration in our measures of market internals. As a result, our estimate of potential market losses over a 6-month window is now in the worst 0.5% of historical observations. In particular, we're seeing a very broad-based downward shift in market action across nearly every industry group. While the depth
of the breakdown is still fairly shallow, the uniformity
of the signal suggests significant information content (for more on this distinction, see the note on extracting economic signals from multiple sensors in Do I Feel Lucky?
). Though our market concerns are independent of our economic concerns, we see essentially the same downward uniformity in leading economic measures across the industrialized and developing world (for example, see the charts near the end of last week's comment Is the Fed Promoting Recovery or Desperation?
Of course, our risk estimates are based on the average
market outcomes that have followed similar evidence over the past century, and this particular instance may be different. Regardless, I remain in the uncomfortable position of having to express our concerns with the word "warning." Read the complete commentary
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