"S&P 500 index staged an ~8% rally so far this year, however, the underlying market breadth by some measures is the weakest ever — narrowest stock leadership in an up market since 1990s," he said in an April 25 note.
"It's tempting to observe the market advance since October and imagine that neither valuations nor internals matter. But look carefully at the 2000-2002 and 2007-2009 collapses. Both included several extended bear market rallies with no sustained improvement in our gauge of internals," he said."When extreme valuations are joined by ragged internals, the collapses come seemingly out of nowhere – the phrase 'trap door' is intentional.
Investors are waiting to see how the economy holds up to the most hawkish Fed policy in decades. Recession calls are now common, and a spike in unemployment and a drop in consumer spending could spell bad news for earnings and stocks. Recession indicators like the Treasury yield curve and The Conference Board's Leading Economic Index are pointing to a downturn ahead, but the labor market so far remains intact with unemployment at a historically-low 3.4%.
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