The Great Disconnect, Valuation Chart-a-Rama, Dow Theory Non-Confirmation

By the Curmudgeon with Victor Sperandeo

 

 

Wall Street vs Main Street and the “K Shaped” Economy:

The intense fervor for stocks is astonishing, considering that the Iran conflict is unresolved and the Strait of Hormuz is still closed. This bullish phenomenon is at odds with how investors normally respond to geopolitical and economic uncertainty. 

The U.S. stock market normally responds to such uncertainty with increased volatility and strong selling pressure, as investors struggle to price in unknown risks. Historically, the market finds "bad news" easier to handle than "uncertainty" because bad news can be quantified and discounted, whereas uncertainty keeps investors from making high-confidence projections of corporate earnings and inflation.

-->What could be more uncertain than the current geopolitical turmoil, private credit/loan problems and all-time low in consumer sentiment?

Equally baffling is the major disconnect between Wall Street and Main Street as clearly depicted in this chart:


The final reading for Consumer Sentiment in April, released this past week, showed a slight improvement from the preliminary reading of 47.6. However, the final reading of 49.8 remains below any other time in history – even as the ceasefire with Iran was extended and the stock market has rallied strongly. At the same time, inflation expectations for the year ahead remained elevated at 4.7% as inflation concerns become entrenched.

Wall Street profits while Main Street experiences financial stress, fueling a “K-shaped” U.S. economy.  Sustained economic momentum hinges on the top 10% of households; a downturn in asset prices or high-income layoffs could upend this balance.


Image credit: Awealthofcommonsense.com

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Meanwhile, the economic divide is widening fast, with more than a quarter of U.S. households now expecting to be worse off financially. That’s the highest proportion since May 2024.  Delinquency rates on student loans, credit card debt, and auto obligations continue to move higher while the percentage of Americans that believe the country is heading in the wrong direction is nearly 60% as per a Real Clear Politics poll.

Bond Bear vs Stock Bull since 150 bps of Fed Rate Cuts began on September 18, 2024:

It’s highly unusual for a prolonged bond bear market, especially after several Federal Reserve rate cuts, while stocks remain in a strong bull market during the same period. Yet that’s the picture since the Fed started cutting short term rates in September 18, 2024.  The Fed Funds rate has dropped from a range of 5.25% to 5.5% before that 50-bps cut to 3.50% to 3.75% currently.  That’s a full 1.5% drop in U.S. short term rates while U.S. note and bond yields have INCREASED (prices decreased).

For example, the benchmark 10-year U.S. T-Note yield closed at 4.31% Friday but was 3.96% on Feb 27, 2026 (one day before Iraq war) and 3.64% on Sept 17 2024 (one day before the Fed's 50bps jumbo rate cut).  30-year T-bond rates have risen even more during that period.

Yet stocks have soared since Sept 17, 2024 (with two very strong V-shaped recoveries) to reach all-time highs in both the S&P 500 and NASDAQ Composite/NASDAQ 100.

·        The S&P 500 Total Return index (which includes dividends) rose from approximately 12,180 on Sept 17, 2024, to finish at 15,989.69 on Friday, April 24, 2026, representing a total return of approximately 31%.

·        The NASDAQ-100 Total Return index grew from roughly 23,000 to 33,272.34 on April 24, 2026, marking a gain of over 40% during the same period.

U.S. Stock Market Valuations are in another Solar System:

Elliott Wave International’s Pluto Chart from October 2024 implies stock market valuations extended beyond demoted planet Pluto.  They’re much higher today!  For example, the S&P 500 Price to Sales ratio is at an all-time high of 3.53 as per this chart:


Source: https://www.multpl.com/

The S&P 500 dividend yield, which for all years before the early 1990s was in the “death zone” if it fell below 3%, is now at 1.1% as of Friday’s close.


Source: https://www.multpl.com/

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U.S. Total Market Cap over GDP ratio = 227.4% s of April 23, 2026:

Source: Guru Focus

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Here’s an EWI Stock Market Valuation chart from January 23, 2026:


Finally, here are a few other S&P 500 valuation stats as of Friday April 24th closing prices:

1.     Current S&P 500 PE Ratio: 30.78 +0.24 (0.80%)

Mean: 16.21   Median: 15.07         Min:     5.31 (Dec 1917)

2.     Current Shiller PE Ratio: 40.66 +0.32 (0.80%)

Mean:    17.36    Median:  16.07          Min:  4.78 (Dec 1920)

3.     Current S&P 500 Price to Book Value: 5.67 +0.04 (0.80%)

Mean: 3.16   Median:     2.91               Min: 1.78   (Mar 2009)

Source: https://www.multpl.com/

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Victor on the Fed:

No Fed Funds rate changes are expected at the April 29th FOMC meeting, which will be Fed Chairman Jerome Powell’s final meeting before his term concludes on May 15th. Kevin Warsh is broadly expected to succeed him at that time. The Justice Dept. has dropped its investigation of Powell, clearing the way for Warsh’s Senate confirmation. 

What’s not known is whether Powell will remain a voting Fed Governor through 2028 when his Fed term expires.

The next scheduled FOMC meeting is June 16–17th and I expect the Fed to cut rates by 50 bps due to a weakening U.S. economy [1.].  I feel very strongly about much lower short-term interest rates in the 2nd half of 2026.

NOTE 1.  The CME Fed Watch Tool assigns a 94.4% probability of no rate change at that June FOMC meeting.

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Dow Theory Non-Confirmation:

From a technical standpoint, a notable Dow Theory non-confirmation occurred last week. The Dow Jones Transportation Average (DJT) hit a new all-time high on April 21st at 24,201.98, while the Dow Jones Industrial Average failed to confirm the move because it did not also make a new high. The subsequent sharp reversal in the Transports—closing the week down approximately 14.2%—heightens the relevance of this divergence.  A non-confirmation is NOT a bear market signal, but it is a short term sell signal.

From a Dow Theory perspective, this type of non-confirmation often reflects weakening breadth beneath headline indices, particularly when leadership narrows and big tech stocks decouple from broader industrial stock performance. The Transports are traditionally viewed as a leading indicator of real economic activity.  Failure to sustain new DJT highs, especially when followed by a rapid and sharp drawdown, raises the probability of a short-term correction.


Separately, why the DJT rallied to new highs in the face of an oil shortage and much higher oil and gas prices is a real “head scratcher.”  The resilience—and brief breakout—of the Transports in the face of tightening energy conditions remains difficult to reconcile fundamentally. Index-level performance appears to have been influenced by out-sized moves in select components, especially Avis Budget Group (CAR), highlighting the growing role of concentration effects, speculation, and liquidity dynamics in headline DJT index behavior.

It’s important to note that a Dow Theory non-confirmation is NOT a major sell signal. A more definitive bearish implication would require a joint breakdown below recent intermediate lows in both the Transports and the Industrials, ideally accompanied by expanding volume and downside momentum.

Under classical Dow Theory, a confirmed cyclical top (and ensuing bear market) would require a breakdown below key intermediate lows: 17,710.92 for the Transports (March 11th) and 45,166.64 for the Industrials (March 27th), ideally on volume at least 2x the 30-day average volume.

Until then, the divergence should be treated as an early warning sign rather than a confirmed trend reversal.  Going forward, the Transports warrant closer monitoring given the speed and magnitude of the DJT reversal this past week.

-->The equity markets have changed dramatically after Obama won the 2008 Presidential election. While many older indicators are passι, IMHO the Dow Theory is still valid.  It continues to provide a useful insight to the market when integrated with technical, macro and liquidity analysis.

Victor on the Markets:

Geopolitical risk remains a key underappreciated variable. The Iran War is far from over and, as a result, WTI/Brent oil and Heating Oil will trade much higher.  Any disruption to critical supply routes—most notably the Strait of Hormuz (which remains closed)—could materially tighten global energy markets within a short time frame, with direct implications for inflation trajectories, central bank policy paths, and broader risk asset performance.

End Quote:

Trump’s method of making decisions is best expressed by Elton John with Eric Clapton on guitar in the song Runaway Train. Here’s the ending:

-Oh I'm out of control and out of my hands.

-I'm tearing like a demon through no man's land.

-Trying to get a grip on my life again.

-Nothing hits harder than a runaway train.


Stay healthy, wishing you success and good luck.  Till next time…….


The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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