The overall profile of market conditions continues to feature: 1) hypervaluation on the measures we find best-correlated with actual subsequent S&P 500 total returns, coupled with 2) continued deterioration in our measures of market internals, which are the most reliable tools we've found to gauge the psychological inclination of investors toward speculation or risk-aversion.
It bears repeating that valuations are remarkably informative about the prospects for market returns over horizons of about 10-12 years, but are nearly useless by themselves over shorter segments of the market cycle. Over those shorter horizons, market fluctuations are driven mainly by investor psychology. To measure that psychology, we can take advantage of the fact that investors tend to become indiscriminate when they are inclined to speculate. Speculative psychology is revealed by uniformity of market action across the full spectrum of securities and security-types, while breakdowns and divergences reveal growing risk-aversion.
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