Research.LeutholdGroup

We always do our own work and draw our own conclusions. Lately, though, we’ve wondered what the late “Monetary Marty” Zweig might say about the stock market’s current liquidity backdrop.

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We think the current economic cycle is more likely to end in a deflationary bust than with a bout of late-cycle “overheating,” and analysts and investors should recognize that such a cycle ending could be especially difficult to detect.

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Confidence in the U.S. economy’s health reached a new peak with the April employment report, with a blowout number for nonfarm payroll coinciding with a soft wage print.

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The December employment report temporarily eased fears of a severe U.S. slowdown. That’s a mystery to us.

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Market action has been broader and better than we expected given monetary conditions, and Small Cap strength seems to lend credence to contention that rates aren’t yet high enough to bite.

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Last week’s piece challenged the now popular view that new highs for the Russell 2000 are a decisively bullish factor for the stock market in the near term. To our surprise, we found that market returns during periods of well-defined Small Cap leadership are significantly lower than when Smalls are laggards.

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The deterioration in stock market liquidity remains at the forefront of our concerns and is a key reason that the Major Trend Index is hovering just above its bearish threshold of 0.95...

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Last month we detailed a handful of economic and monetary measures that were approaching critical thresholds from a stock market perspective.

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Our Dow Bond Oscillator (chart) issued what looks like an increasingly prescient SELL signal on January 26th.

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