When the leaders roll over first

Everyone watches the same number: the level of the index. It is close to the least informative thing on the screen. By the time a great advance is in trouble, the headline is often still setting records — while the damage has already begun underneath it, in the corner of the market no one is quoting on television.

A signal that has flashed only a handful of times in a century

The veteran investor Jeremy Grantham, who has spent a career studying market bubbles, has described a late-cycle tell that in his reading has appeared only a few times since the 1920s (speaking on Bloomberg’s Odd Lots). It is not the index falling. It is the reverse: the previous year’s most speculative winners begin to decline while the broad market is still rising. The leaders do not merely lag a rising market — they fall as it climbs.

In his account the pattern preceded the worst setups of the modern era. In 1972, at the peak of the go-go leaders, the index rose while the average stock fell. In 2000, the speculative growth names peaked months before the rest of the market. In 2021, the meme stocks and profitless-technology darlings were already down sharply from their highs while the headline index powered on. Each time, the market’s leadership turned before its level did.

Why the internals matter more than the index

The mechanism is not mystical. A healthy bull market is broad — many things rise together. A tired one narrows: fewer and fewer names carry the index, and the marginal buyer, running low on both new money and fresh conviction, quietly sells the most speculative holdings first while clinging to the perceived safety of the giants. Breadth deteriorates before price does. A market can therefore set new highs on a shrinking base — and that narrowing is not reassurance. It is the warning.

It is the same fact our piece on the question index investors don’t ask describes from the other side. When a handful of names drive the entire result, a market-cap index has quietly become a momentum bet on those names — and it is the internals, not the headline level, that tell you when that bet is starting to wobble.

None of this is a prophecy about this particular market; it is a lens for reading any market. Today the observation is simply topical, because the index has rarely rested on a smaller group of names. The more the result depends on a few leaders, the more it is worth watching those leaders directly — not to time an exit, but to know whether the advance beneath the headline is still broad, or has quietly become the property of a shrinking few.

“But we are at all-time highs”

That is precisely the objection, and precisely the trap. New highs feel like confirmation; late in a cycle they are often the last thing a narrowing market does before it stops. The purpose of watching leadership is not to predict the day it turns — no one can do that reliably — but to notice when the character of the advance shifts from broad to brittle. A forecast tells you when. A discipline tells you how much risk to carry given what the market is actually doing.

What we do with it

We do not try to call the top. We treat market internals — breadth, leadership, and the behaviour of the most speculative cohort — as one input among several, read alongside the starting valuation that the Excess CAPE Yield makes visible. When the leaders roll over while the index still climbs, we do not sell everything. We lean harder on the discipline we already run: sizing positions by risk rather than by momentum, and building the floor before the ceiling. A change in the market’s character then shows up as a change in how much risk we hold — not as a scramble for the exit.

The index is the last thing to break. The information is always underneath it.

This article is general information and education — not investment advice, a recommendation, or a forecast. It reflects our own reading of a publicly-stated view, which we reference and attribute rather than reproduce, and it does not take account of your circumstances.