Market Contrasts: Record Highs Mask Weakness, Gold Surges

Beneath the surface of record-setting stock market indices, significant underlying weaknesses were developing long before geopolitical trade tensions captured widespread attention. While major benchmarks suggested robust health, a closer examination revealed a contrasting picture of internal market fragility and narrowing participation.

Narrow Market Leadership and Valuation Concerns

The primary US stock indices, such as the S&P 500, Nasdaq, and Dow Jones, reached impressive heights earlier in the year. However, this ascent was largely powered by a select few mega-cap technology stocks. A significant portion of the S&P 500’s gains in 2024, for instance, was attributed solely to the group known as the “Magnificent Seven”, as investment flowed heavily into themes surrounding artificial intelligence.

This concentration of performance created a divergence. According to Carter Worth of Worth Charting, “The real weakness started well before the peak in the indices, and that was visible in individual stock prices.” Data from late March highlighted this disparity: the average US stock was trading approximately 32.3% below its 52-week high, whereas the broader market index was only about 9.6% off its peak. This indicated that while the generals (indices) advanced, many soldiers (individual stocks) were retreating.

Furthermore, lofty earnings expectations added to the market’s precariousness. Adam Turnquist from LPL Financial noted that the bar was set “very high from the beginning of the year,” potentially setting the stage for disappointment. Valuation metrics also flashed warning signs. Bank of America had previously pointed out that the S&P 500’s price-to-book ratio had surpassed levels seen during the dot-com bubble peak in 2000, suggesting potential overvaluation.

Technical Signals Pointing Downward

Beyond narrow leadership, technical indicators and sector performance also signaled caution. Key technology giants experienced substantial pullbacks from their recent highs; Microsoft (MSFT) saw a decline exceeding 21%, and Nvidia (NVDA) dropped significantly after its peak. Importantly, the Dow Jones Transportation Average, often seen as an economic bellwether, had fallen considerably from its prior highs, indicating broader economic concerns.

A critical structural signal, highlighted by Worth, involved the 150-day moving average of the broad Russell 3000 index. Its flattening for the first time in two years was interpreted as confirmation of the beginning of a “structural bear market,” suggesting a longer-term shift in market dynamics rather than a temporary dip.

Shift Towards Defensive Assets: The Gold Rally

Reinforcing the theme of a market phase change was the notable rally in gold. The precious metal surged to historic highs, surpassing $3,300 per ounce in April. This move is traditionally viewed as a flight to safety, indicating increased risk aversion among investors.

From a technical standpoint, gold’s monthly Relative Strength Index (RSI) climbed above 86. This is a rare occurrence, observed only a handful of times since 1975. Historically, such extreme readings have often preceded significant double-digit percentage declines in the gold price, suggesting the rally might be overheated, even as it reflects current defensive positioning.

The prevailing market environment is characterized by “deep uncertainty, with geopolitical risks and economic stagnation,” Worth cautioned. He advised that this backdrop does not support expanding price-to-earnings multiples based on optimism alone. “This is not paid for with enthusiasm, but with caution. The fever has broken,” he concluded, emphasizing a necessary shift towards a more conservative investment approach.