The S&P 500 is within 2% of its all-time high. Look underneath the index, though, and the picture is very different. As of October 1, about 76% of the stocks in the S&P 500 were at least 10% below their 52-week highs, and 83% were at least 10% below their all-time highs. In our data going back to 1991, the market has never been this narrow with the index this close to a record. A handful of very large companies are carrying the average while most of the market quietly lags.
That’s the honest case for a top, and it deserves respect. The closest parallel to today is 1999 into 2000. Twelve months after days like that, the S&P 500 was lower more often than not, with a median decline of about 9.5%, and nearly all of that came from the 2000 peak. When leadership shrinks to a few names, the market becomes fragile. It takes less to tip it over.
But tops take longer to form than most headlines suggest, and the shorter-term evidence points the other way. In late September, two widely watched gauges of how many stocks are participating, the McClellan Oscillator and the Zweig breadth indicator, both fell to oversold levels. Since 1991, when breadth washed out like this while the S&P 500 sat near a high, the index was higher three months later about 80% of the time. In the nine closest matches to today, where narrow breadth and an oversold reading showed up together, the market was higher three months later in seven, with a median gain of about 3.6%. Even among those, 1998 saw a 15% drop before the recovery came.
The calendar helps too. This is a midterm election year, and October through January of midterm years has historically been one of the stronger stretches of the four-year cycle. Since 1954, the S&P 500 rose over that window in 16 of 18 midterm years, with a median gain of about 12.9%. There’s an important asterisk. The biggest midterm rallies started from markets that had already sold off hard. In the five midterm years that began near a record high, like this one, the median gain was a much more modest 1.7%, and 2018 fell 7%. Seasonality is a tailwind, not a promise.
One more signal is worth watching. Gold peaked against stocks in late January, and over the next six months the ratio of the S&P 500 to gold climbed about 34%. Since 2000, there have been five completed surges of that size. The S&P 500 was higher six months later in every one of them.
So is the market at a top? History suggests a top is unlikely over the next few months, and the shorter-term evidence leans positive. On a 12-month view, though, the narrowness is a real risk, and it’s not something we’d ignore.
Here’s what we’d tell any client: don’t try to call the exact top. In a market like this, we stay invested with discipline, avoid piling into the handful of names that have already done the heaviest lifting, harvest losses where it helps a client’s tax picture, and rely on rules, not judgment alone, to decide when to reduce risk. Our Adaptive Investing process uses proprietary risk-off signals that tell us when to reduce equity exposure. As of this writing, they haven’t triggered. If they do, our process is to act on them, not debate them. When the evidence changes, we change with it.
If you’re not sure how concentrated your portfolio has become, that’s worth an hour. Give us a call.
For informational and educational purposes only. Not investment, tax, or legal advice. Breadth, seasonality, and gold-ratio statistics are Lake Hills Wealth Management’s analysis of historical S&P 500 index data for the periods stated; they describe past index behavior, not the results of any client account or strategy, and small sample sizes limit their reliability. Our risk-off signals are proprietary, rules-based indicators designed to help manage risk. They may lag market moves, can generate false signals, and do not eliminate the risk of loss or guarantee that losses will be avoided. You can’t invest directly in an index. Past performance doesn’t guarantee future results. Forward-looking statements reflect our current views and are subject to change. Investing involves risk, including the possible loss of principal. Additional information about Lake Hills Wealth Management, including our Form ADV Part 2A and Form CRS, is available at lakehillswm.com. Lake Hills Wealth Management is an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training.