Milton Berg: The Stock Market Is In Trouble

Episode Summary

Executive Summary: Milton Berg argued his January bullish call was supported by a dense cluster of historical technical buy signals, and that the market has since rallied as expected. But he now sees the advance as potentially corrective rather than a durable new bull market, citing weakening breadth, narrow leadership, gaps, sentiment extremes, Fed tightening, and lagging banks/China/Russell 2000 as warning signs.

Main Topics: Review of the January bullish call (Priority: 5/5): Berg revisits why he was bullish in January 2023, emphasizing that he had more than 60 bullish indicators and no bearish ones, rather than relying on subjective charting. Technical buy signals from January and late summer (Priority: 5/5): He details several historical thrust/volume/put-call signals from Jan. 6 and Aug. 28-29 that historically precede strong rebounds, but he frames them as rally/cover-shorts signals rather than proof of a lasting bull market. Why the current rally may be corrective (Priority: 5/5): Berg argues the advance since October/January lacks the early-move momentum typical of major bull markets and may instead be a bear-market rally within a larger downtrend. Breadth, gaps, and sentiment deterioration (Priority: 4/5): He warns that many upside and downside gaps, narrow mega-cap leadership, and complacent sentiment around recession risk are classic late-cycle or topping characteristics. Macro/fundamental cross-checks (Priority: 4/5): Although he prefers technicals, Berg says real rates, the Fed’s tightening, declining money supply, weak gross domestic income, and banking stress all support a cautious outlook. Intermarket divergences: banks, Russell 2000, China, Hong Kong (Priority: 4/5): He highlights that several risk assets and cyclical areas peaked earlier than the S&P/Nasdaq, suggesting the market’s internals are weaker than headline indices imply. Cycles and market timing (Priority: 3/5): Berg explains his Montgomery cycle dates and says the next few months contain multiple cycle turning points that could produce emotionally driven market swings.

Key Arguments: The January 2023 bullish call worked because more than 60 indicators were bullish and none were bearish; technical evidence mattered more than Fed headlines. The January 6 signal (strong up day, 28:1 upside/downside volume, volume above the prior day) historically had strong forward returns, supporting the upside call. Late-August buy signals are real but are not necessarily bull-market buy signals; they more likely suggest covering shorts and expecting a rally before a later sell signal. The market’s advance since October 2022/January 2023 lacks the early momentum normally seen at major bull-market starts; the strongest 5-day rally in this move was only 6.35% by day 21 versus 10%-17% in prior bull markets. Narrow leadership by the Magnificent Seven does not by itself prove a top, but combined with weak breadth, lagging small caps, China, and banks, it becomes concerning. Upside and downside gaps, along with low put-call ratios and sentiment complacency, indicate emotional trading rather than an orderly healthy uptrend. Real rates finally turned restrictive, money supply has tightened, and gross domestic income has weakened, increasing recession/banking-crisis risk. Banks are the canary in the coal mine: the KBW bank index diverged from the S&P/Nasdaq and bottomed much later, implying hidden stress beneath the surface. China and Hong Kong peaking months before U.S. indices is interpreted as another intermarket warning that the rally may be late-cycle. Cycles are a supplementary tool: Berg believes several upcoming Montgomery dates could act as market turning points over the next two months.

Data Points: Bullish indicators in January 2023: 60+ indicators - Berg said he had over 60 bullish indicators and no bearish ones around the January 2023 appearance. S&P 500 upside/downside volume: 28:1 - January 6 signal used as an extreme breadth thrust measure. January 6 signal threshold: Up at least 2% on the day; volume above prior day - One of Berg’s key historical buy-signal components. Median 1-year return after January 6-style signal: 22.86% - Historical average forward gain Berg cited for that signal type. Projected S&P target from January signal: ~4,700 to 4,785 - Berg said the signal projected roughly a 22% gain from the market low area. October 28 breadth thrust: 2.04:1 upside/downside advanced-decline ratio on a 10-day basis - Broad market thrust signal after the October 11 low. Projected gain from October breadth thrust: 20% - Berg said this projected to about 4,687 and they rounded to 4,650. October 25 advance/decline volume condition: >9:1 in 3 of the last 10 days - Another concentrated thrust signal Berg cited from the autumn lows. October 3 trend signal: Trend above 4 - Interpreted as panic-selling concentration and projected a 21% gain. August 2023 correction depth: S&P about 5%; Nasdaq about 8%; SOX about 13% - The pullback that generated late-August buy signals. Aug. 28 put-call condition: 10-day put-call ratio at a 6-month high; 3-day ratio elevated - Berg said this kind of setup historically often leads to a rally. Aug. 29 signal frequency: 24 historical instances; 87.5% success rate - A broad short-term buy signal he said usually leads higher. Weakest successful return for Aug. 29-type signal: 4.45% - Berg noted even the weakest historical success still rallied meaningfully. NASDAQ 100 gain cited: 41.84% - Berg argued this is not the strongest start ever on a comparable basis. Comparable NASDAQ 100 rally in 1987: 43.2% - Used as historical comparison for a 30%+ decline backdrop. Comparable NASDAQ 100 rally in 2002: 47.29% - Historical comparison for bear-market/bounce strength. Comparable NASDAQ 100 rally in 2008: 47.35% - Historical comparison for rally magnitude. Comparable bear-market rallies in 2001: 52% and 49% - Used to argue current move could still be corrective. Real policy stance: Real federal funds rate positive for the first time since June; Fed tightening for nearly two years - Berg argued restrictive policy is finally biting. GDI deterioration: Declined in 3 of the past 4 quarters - He cited gross domestic income as a weaker signal than GDP. Banking index divergence: KBW bank index down 24% from its October low while S&P was up about 13.5% - Evidence of hidden stress in financials. Russell 2000 leadership failure: Never got above its February 2 intraday high - Used to show small-cap weakness despite the headline rally. Cycle dates ahead: Sep 14, Sep 29, Oct 14, Oct 28, Nov 13, Nov 27 - Montgomery cycle dates Berg said could mark turning points. China rally from low: Up 29.04% off the October low - Despite the rebound, Berg remained bearish on China due to failure to sustain momentum. China gain into January peak: 60.7% - He used this as evidence of a strong but potentially exhausted rebound.

Pivotal Quotes: "I challenged the bears." — Milton Berg: Explaining why he was bullish in January 2023 despite widespread recession fear. "These are not bull market buy signals. These are buy signals just telling you, cover your shorts." — Milton Berg: Clarifying the meaning of the late-August technical signals. "There’s something very, very wrong with this market." — Milton Berg: Framing his broader caution despite near-term bullish signals.

Implications: Listeners should distinguish short-term technical rebounds from durable trend confirmation. Berg sees near-term upside possible, but warns that weak breadth, restrictive policy, and intermarket divergences raise the odds of a broader market top or recession-linked decline.