The following chart pretty much captures why I have mixed feelings about 2026. It shows US financial conditions. This indicator should be used as a contrarian indicator. As you can see, when conditions are very accommodative, i.e. above 1 for at least a few months, the markets were close to making a significant peak and conversely, when conditions were tight, i.e. below -1, the market was close to making a significant low.
This is not a perfect indicator (no single indicator is). It will not give advance warning to declines as a result of exogenous shocks like COVID and "Liberation day" because these are negative events that essentially came out of nowhere. It should also be noted that in 2014 when this indicator flashed red, the market still had a good year returning 14% with the largest correction being 8.5% . Then, in 2015 the SPX had a flat year with the largest correction being 12.5%. So, it would have been best to have ignored the warning in 2014. Currently, we are just below the 1 level after having touched it very briefly in October. This suggests the market is much closer to a top than a bottom but also that there's still room for the market to go higher before reaching redline territory, although that shouldn't be taken as a given. This pretty much sums up my feelings of the market based upon my observations of several intermediate term sentiment indicators which is this: there is still room to run but we would be redlining should that happen without a correction of at least 5-10%. which would then set us up for a even larger decline.
News flash: The US has captured Maduro and made military strikes in Venezuela. Let's see how markets respond on Monday.
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