Research.LeutholdGroup

Despite the Fed’s tough-talk about getting the funds rate above 5%, monetary and liquidity measures are significantly less bearish. Thank SVB depositors, who required a bailout big enough to reverse five months of QT in just two weeks. The market reaction looks like that after September 2019’s Overnight Repo-market turmoil, which forced the Fed to end its first experiment with QT.

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Among the latest bullish cues, we’d put the most weight on the MBI breadth-thrust signal because it’s the only one among a variety of measures we track that hasn’t falsely triggered during a bear market. Perhaps its first misfire is imminent. 

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This year is off to a much stronger start than suggested by the 3-4% gains in the blue-chip averages: Through January 12th, the Value Line Arithmetic Composite—an equally-weighted index of about 1,700 stocks, was up 7.0%.

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“Don’t fight the Fed” was profitable advice dispensed almost daily by bulls in the 2nd half of 2020 and all of 2021. It’s been valuable advice in 2022, as well. However, when the Fed turned hostile earlier this year, the bulls deviated from their own sound advice and looked for new narratives.

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Many technicians contend that the rebound off June’s lows triggered a bear-market-killing “breadth thrust.” Several gauges we monitor to capture this phenomenon contradict that claim. None has reached a threshold that is extreme enough to qualify as a thrust.

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Many technicians claim that the rallies of late March and late May generated impressive “breadth thrusts.” We’re skeptical: We’ve tested many tools that attempt to capture such a phenomenon, and found that the most reliable thrust signals aren’t ones that show up every couple of months.

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This summer marks the first anniversary, not of the COVID-19 stock-market low, itself, but of the much belated “confirmation” of that low.

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We’re concerned that cyclical groups, which normally catch fire after a breadth thrust, are tracking along the bottom (or below) the previous worst-case outcomes following identical breadth-thrust signals.

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There are two concerns with the latest bullish thrust signal, with one, in part, causing the other. First, the S&P 500 return preceding the MBI thrust signal was +42.8%, almost triple the average slippage of +15% associated with all prior signals.

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During the first two months of the rally (and +30%) off the March lows, we noted that the usual cyclical leaders of a new bull market were underperforming on a relative basis, and there had been nothing even close to the “breadth thrust” that often accompanies an initial bull market up-leg.

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The average “super-overbought” MBI reading occurred 54 days after a market low; June 4th marks the 51st trading day since the March 23rd low. Thus, any signal in the days ahead would arrive essentially “on time,” but the slippage (the S&P 500 gain already realized) would be enormous at around 40%!

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Last month we detailed two technical shortcomings of the rally off the March 23rd market low. The stock market duly noted our critique and has issued its response.

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One would think that one of the most explosive market rallies of all time would trip-off all the traditional “breadth thrust” signals, or maybe even invent a few of its own. Sorry, no luck.

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Through last night’s close, the S&P 500 had gained 25.0% in exactly one month. Impressive, but a bit superficial. Anyone running active equity portfolios recognizes the breadth of this move has been unusually narrow.

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