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The Titanic Indicator Has Been Right for the Past Two Years. It’s Flashing Red for the Stock Market

Dec. 6, 2019 at 10:52 a.m. ET By Ben Walsh - Barron's


Stocks are racing higher after the jobs report smashed expectations, but one market signal is flashing red.


SentimenTrader’s Troy Bombardia said in a note to clients Wednesday that the market hit a Titanic Syndrome signal earlier in the week. That occurs when stocks hit a record composite high, followed by more 52-week lows than highs.


“These signals have been particularly accurate over the past 2 years, with each instance resulting in a meaningful pullback or correction,” he wrote. “Historical cases in which the Titanic Syndrome triggered saw worse than average returns for the stock market in the weeks and months ahead, during which it was better to hold bonds than stocks.”


The stock market has, of course, recently hit record levels. And for years during the current bull market, traditional value-focused measures of whether stocks were over- or undervalued have failed to predict the returns of broad indexes like the S&P 500.


Those fundamental indicators haven’t been as accurate during the recent bull market because companies have been able to generate extremely strong earnings growth for far longer than history would predict. One reason why: “The single largest contributor to the earnings growth seen on the S&P since the early 2000s has been a redistribution of wealth away from Labour and to Capital,” Bernstein analyst Paul Gait recently wrote. That shift “amounts to one half of the growth in earnings seen over this period and one third of current US corporate profits.”

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