Often quoted by me on this blog, Mark Baum in *The Big Short *said it best:
“It is a shitstorm out here, sweetie. You have no idea the kind of crap people are pulling. And everyone’s walking around like they’re in a goddamn Enya video.”
Because right now, it seems like everybody looks at the market and tells themselves that almost nothing particularly unusual is happening. Stocks keep moving to all-time highs, there’s no sense of urgency on financial newsmedia, things like Fartcoin…well, still exist. Market participants don’t seem to have a care in the world.
But every day we get a peek of something different under the hood of this market, and it seems like we get yet another “shitstorm” to worry about it while the rest of the world watches the baseball playoffs.
For example, Bloomberg pointed out yesterday that the equal-weighted S&P 500, which strips away much of the distorting effect of the Mag 7 (hereinafter referred to as “The 7 Stocks of The Apocalypse”) by giving every constituent the same weight, is on pace for its seventh consecutive losing week.
If that streak survives through Friday, it would be only the third seven-week losing streak in the history of the index. The other two occurred in 2002, during the aftermath of the dot-com collapse, and in 2022, during that year’s bear market.
The weakness is hardly isolated. Only two S&P 500 sectors managed to rise during September, information technology and communication services, both of which are heavily influenced by enormous technology companies.
Financials, meanwhile, were the month’s worst performing sector, falling nearly 7%, while the KBW Bank Index slipped into correction territory after peaking in August. The regional banking ETF (one of 10 areas of the market I said I’d be hell bent on avoiding about a year ago) is down -6.54% over the last month.
Yet the headline S&P 500 continues to look relatively serene because the strength of a small collection of enormous companies has been doing an increasingly impressive job of disguising what is happening everywhere else. Bloomberg noted that the difference between the apparent calm at the index level and the turmoil among individual stocks has widened to levels last seen around the dot-com collapse.
The equal-weighted S&P 500 fell -4.4% in September, its worst month since March. For the third quarter, the normal capitalization-weighted S&P 500 actually gained +2.82%, while its equal-weight counterpart lost 1.67%. For the last month period, YCharts shows the RSP down -5.2% but the SPY down just -0.58%.
That is a remarkable divergence for two indices containing exactly the same 500 companies.
Goldman Sachs highlighted just how strange things have become this week, noting that strength in AI-related stocks has kept the S&P 500 relatively steady while market breadth has deteriorated to its weakest level since the dot-com bubble. According to strategist Ben Snider, the median S&P 500 stock is now trading roughly 16% below its 52-week high.
As 𝕏one user on X noted days ago: “60% of S&P 500 stocks are now trading below their 100-day moving average, the worst market breadth since March.”
Ned Davis Research found that while the S&P 500 was sitting less than 2% below its all-time high, fewer than one quarter of its constituents were above their 50-day moving averages and fewer than 45% were above their 200-day averages.
According to NDR, that represents the worst breadth ever recorded with the S&P 500 this close to a record high. Since 1980, the combination of fewer than 35% of stocks above their 50-day average, fewer than 50% above their 200-day average and the S&P 500 sitting within 3% of a record has occurred only six times.
By Wednesday’s close, some breadth measures had deteriorated even further. One market breadth database put just 21% of S&P 500 constituents above their 50-day moving averages, 31% above their 100-day averages and 40% above their 200-day averages, even with SPY only about 2% below its high.
Its historical screen, using CRSP industry portfolios to extend the breadth data back to 1927, found only three previous matches: September 1972, March 2000 and May 2023. This is why I included the RSP on my list of the 11 ETFs I’d pick if I had to just “set and forget” a portfolio for the next 20 years. I think because it’s overshooting to the downside now, it’ll plunge less than the SPY during a crash, and maybe even outperform on the way back up.
And look, bad breadth does not guarantee a crash, and anybody claiming otherwise is selling certainty that does not exist. Markets can remain narrow for surprisingly long periods, and enormous companies can continue dragging capitalization-weighted indices higher even while most stocks struggle underneath them.
But breadth becomes considerably more important when you ask why it is deteriorating and in the face of a bond market that appears hell bent on ensuring equities crash.
Days ago, I argued that the end of structurally cheap money would force markets to rediscover something they have spent most of the last two decades avoiding: the cost of capital.
The bond market has not calmed down in the days since I wrote that. This morning, the 10-year Treasury yield made new 52 week highs to 5.33% and moved to levels above its 2007 peak, last seen in 2002. The third quarter was the worst quarter for the benchmark yield this century.
The long end is even more remarkable. The 30-year Treasury yield pushed to roughly 5.67% this morning, around its highest level since July 2002.
At the same time, Britain’s 30-year gilt yield has broken above 6% to its highest level since 1998, France’s 10-year yield is approaching 5%, and Japanese sovereign yields have now posted five consecutive quarters of double-digit increases.
In other words, the global cost of capital is repricing higher at exactly the same moment that the internals of the U.S. equity market are deteriorating, and as…in my opinion only…the wheels of the AI trade are starting to fall off in a big way.
The S&P 500 is increasingly behaving like a mansion whose foundation is starting to crack while everybody stands on the roof admiring the view. The capitalization-weighted index remains elevated because a handful of gigantic companies, particularly those associated with the AI trade, carry enough weight to offset weakness almost everywhere else.
But equal-weight stocks are falling. Banks are falling. Midcaps and small caps have been hit harder. Fewer stocks are holding their moving averages. The median stock is nowhere near its high. And those are precisely the areas, along with unprofitable small cap shitcos that need constant capital to survive, where you would expect higher financing costs to begin showing themselves first.
And the bond market just keeps turning the screws tighter.
This is the basic mechanism I have been writing about for a while. Higher Treasury yields do not need to “cause” stocks to fall through some mysterious psychological process. They change the arithmetic underneath virtually every asset on the planet.
A 5.3% 10-year Treasury changes the discount rate applied to future corporate cash flows. A 5.7% 30-year changes mortgage rates, commercial real estate economics and long-duration financing. Higher risk-free rates mean corporate borrowers must pay more because their debt is priced at a spread over Treasuries. Private equity hurdle rates move higher. Refinancing becomes more painful. Leveraged companies lose flexibility. Consumers face more expensive mortgages and loans. Governments devote more revenue to servicing debt. And at some point, something has to give.
For most of the post-financial-crisis era, investors could effectively ignore this mechanism because whenever financial conditions became sufficiently uncomfortable, rates eventually went lower and liquidity eventually arrived. The cost of capital repeatedly disappeared as a meaningful constraint.
As I noted last week, we couldn’t have been more arrogant. We laughed off our country’s credit downgrades. Economists and analysts turned into total pussies and cowards, crumbling into bits every time the market sold off 5%. And financial projections turned to the “invent a number you like first, then backfit a story to it” method of equity valuation.
Cheap capital did not merely raise valuations. It extended the amount of time bad economics could remain hidden. Now, the car is going in reverse and I think market breadth may be one of the first places where the consequences are becoming impossible to hide.
The S&P 500 is not really telling us that everything is fine. It is telling us that a handful of enormous companies are still strong enough to offset an extraordinary amount of weakness underneath them.
I genuinely cannot remember seeing this many red flags flashing simultaneously while the major stock indices remained this indifferent to them. Inflation is above target. Bonds are at brutal levels. Seven stocks are driving the entire stock market higher…and investors have never been less prepared psychologically for a crash.
Maybe the megacaps can continue holding the entire structure together for another few weeks or months. Markets have an almost supernatural ability to remain ridiculous longer than anyone expects, and breadth deterioration by itself has never been a reliable stopwatch for a crash. But they can’t repeal basic math.
The world’s benchmark risk-free rates are sitting at levels we have not seen in roughly a quarter century, and the damage is increasingly visible beneath the surface of the equity market. Almost everything seems to see it now, except the stock market.
So who you going to be believe, me or your lying eyes?
QTR’s Disclaimer**:** Please read my full legal disclaimer on my About page here.
I also may or may not own names I write about and are watching. Sometimes I’m bullish without owning things, sometimes I’m bearish and own things I’m bearish on. Just assume my positions could be exactly the opposite of what you think they are just in case. If I’m long I could quickly be short and vice versa. I won’t update my positions.
I cannot guarantee the accuracy of any or all facts and figures included in this article though I made an effort to get them right. I have been wrong before and will be wrong again, and encourage you to always double check, do your own research and speak to a licensed financial professional, which I am not.
Contributor posts, guest posts and curated posts have been hand selected by me, but have not been fact checked and are the opinions of their authors. They are either submitted to QTR by their author or reprinted under a Creative Commons license with my best effort to uphold what the license asks, or with the permission of the author.
Since 2026, I have been making an attempt to no longer actively trade as much as I once did ( read my story here). In an attempt to lead a healthier lifestyle, I’ve also excluded myself from most fantasy sports, sports betting, online and in-person casinos and prediction markets.
My goal is for my investing/saving to be done by recurring contributions mostly to sector ETFs and a few select equities, trusted third parties who oversee my accounts, and advisors. Such advisors or funds, through individual equities, options, index funds, mutual funds, ETFs, or other securities, may have positions in, exposure to, or holdings of names mentioned herein that I know nothing about. Basically, it is possible I could own, have exposure to, or not own anything, at any point.
You are on your own. Do not make decisions based on my blog. I exist on the fringe. Again, I get shit wrong a lot, both in the market and in life, but am trying my best. If you see numbers and calculations of any sort, assume they are wrong and double check them. I failed Algebra in 8th grade and topped off my high school math accolades by getting a D- in remedial Calculus my senior year, before becoming an English major in college so I could bullshit my way through things easier. Hence, I am a writer. I write these posts after a couple beers sometimes. Many times I edit after my posts are published because I’m impatient and lazy, so if you see a typo, check back in a half hour. Thanks, you’ve been a great crowd and don’t forget to tip your servers.
