SampP 500 indicates precursor to Lehman Brothers bankruptcy filing
A new trend is emerging on the S&P 500 index, signaling potential trouble ahead despite its record gains. Financial news aggregator Zerohedge recently shared data indicating that the index’s rally is struggling to broaden. The equally weighted benchmark relative ratio, which is currently at its lowest level since the 2008 financial crisis, is a cause for concern. The last time the market was this imbalanced, Lehman Brothers’ bankruptcy triggered a global financial meltdown.
In the past, the equally weighted benchmark relative ratio experienced peaks in 2014-2015 and again in 2018-2019, followed by steep declines during the COVID-19 pandemic in 2020. Despite a brief recovery, the ratio has been on a persistent downward trend, reaching new lows in 2023 and 2024. This suggests that the market rally is narrowing, with gains concentrated in a few stocks rather than being distributed across the entire index. As of July 1, 2024, the ratio stood at approximately 1.2, significantly lower than its peak of around 1.55 in 2014.
When the market becomes lopsided like this, it means that only a handful of stocks are driving the index’s performance while the majority lag behind. This creates a fragile market environment that is susceptible to sharp corrections if those leading stocks falter. This trend has been evident recently, with the index’s rally being dominated by tech stocks involved in artificial intelligence, particularly Nvidia. Analysts have issued warnings that the index could experience a crash in the near future.
Piper Sandler, a banking giant, has warned of a potential 10% correction for the S&P 500 in the summer of 2024. They pointed out warning signs such as a lack of breadth and a slowdown in momentum that could lead to a crash. Additionally, the index’s performance has shown similarities to other periods of economic turmoil, with only 30% of S&P 500 stocks outperforming the index year-to-date, similar to the 2000 Dot-com bubble.
Despite these concerns, the S&P 500 index recently reached a record high, closing the last trading session at 5,537 points. However, it is important to note that the content of this article should not be considered investment advice, as investing always carries risks.
