The market dipped lower last week while our US Equity Core percentile continues to sit in historically elevated territory. Should we be concerned once it starts moving lower, and if so, at what level?

Markets fell last week as investors grew more anxious over elevated valuations and AI expenditure, with growth and technology stocks taking the brunt of the damage. Despite that, domestic equities still sit atop our DALI rankings while the US Equity Core S&P 500 group sits comfortably above the 90th percentile of Asset Class Group Scores (ACGS) page. That said, with the groups placing so highly, there’s only so much higher for them to rank, whereas the group has significant room to fall to the downside. Given our potentially elevated territory and recent downtick, should we be worried that the best is behind us, especially once the Core Percentile does weaken?

It’s been over six months since the core group moved above the 90th percentile following April’s tariff tantrum. While readings above 90% have been common the last few years, that hasn’t always been the case. In fact, there have only been six periods in which the core percentile remained above 90% for more than three months. Looking at the S&P 500 after the core percentile falls below 90%, the forward returns are generally positive, especially at longer horizons. While the two-week return saw SPX move lower on average, the six-month average was a robust 10.7%, with the recent tariff tantrum being the strongest of those instances. Interestingly, almost all of those instances came over the last decade. Meanwhile, the “lost decade” lives up to its name, as the indicator’s peak prior to 2010 was just under 70%—a level the market has been over for the entirety of the last five years.

If movement below 90% hasn’t been problematic, what level does the core percentile need to reach before it starts sounding alarm bells for investors? To answer that question, we looked at the forward returns of the S&P 500 depending on the metric’s position. The market’s current level above 90% historically sees slightly below average near-term returns, but the six-month return and onward for the group is notably above average. Specifically, the group averages a 10.1% one-year return, outpacing the 8.4% average by a healthy margin. It isn’t until the indicator moves below 50% that the market experienced below average long-term returns. Specifically, every group above 50% sees a one-year return of at least 10%, whereas periods below 50% have seen significant lower or even negative returns. Even if the core percentile were to fall like it did in April, it can represent a healthy consolidation until the indicator moves below the 50% level or we see similarly bearish movement in other relative strength metrics such as DALI.

In addition to the equity strength, the market’s flight to safety can be an indication of future weakness, and the Money Market’s percentile rank within ACGS serves as a gauge of that fear. The indicator and its corresponding cash triggers have been an ominous sign of worse things to come when in bearish territory. The above numbers look at the average performance when each of the following cash triggers are active:

• MMPR50: A cash trigger that occurs only when the money market percentile rank moves above the 50th percentile of ACGS.
• MMPR70: A cash trigger that occurs only when the money market percentile rank moves above the 70th percentile of ACGS.
• PR4050: A cash trigger that occurs when the money market percentile rank moves above the 50th percentile AND the US Equity core falls below the 40th percentile.
• PR4080: Occurs when money market percentile rank moves above the 80th percentile AND the US Equity core falls below the 40th percentile.

Overall, domestic equity performance is worse or negative across both short-term and intermediate-term horizons, demonstrating the cash triggers’ ability to warn of potential downside before it occurs. It should be noted that these numbers are the average forward return from each day the cash trigger is active. To find the overall performance of using the cash triggers, you can read more here.

In the face of a pullback, it can be easy to panic and act defensively. However, the long-term outlook for domestic equities did not meaningfully change last week, nor did valuations become elevated solely over the last several weeks. Having a disciplined strategy in place that knows when portfolio adjustments are necessary is paramount for those looking to outlast any given bull or bear market. The core equity and money market percentiles are some of the most time-tested indicators on Dorsey Wright, making them crucial for those hoping to build a process to brave the coming years, regardless of future market conditions.