While the Russell 2000 loss during the 2015-16 correction was almost double that of the S&P 500, the decline did not fully erase the P/E premium Small Caps have enjoyed since the middle of last decade. The premium might need to be entirely erased before a multi-year Small Cap leadership cycle can begin.
The S&P 500 decline has yet to come close to a bear threshold, but it’s nonetheless been sufficient to drive the Very Long Term (VLT) Momentum algorithm into oversold territory for the first time since late 2009. In 16 of 21 prior cases, VLT Momentum’s initial oversold reading was a harbinger of a market that was soon to become even more oversold.
Here’s an example of just how disparate underlying market action has become: with the S&P 500 only 2% away from a cycle high, several major U.S. and foreign market indexes have already moved into an oversold position on the basis of our Very Long Term (VLT) algorithm—with a few (including EAFE, Chart 1) actually triggering “long-term, low-risk” BUY signals in the last two months! We are not sure what to make of this action.
As expected, our VLT Momentum algorithm triggered a “low-risk” cyclical buy signal on crude oil in late October, only the 11th buy signal in the past 30 years. This algorithm was originally designed to identify low-risk entry points into the stock market, but we’ve found it useful with other assets as well.
The new debate over the QE “taper” erupted at the same time that a long-reliable Fed-tracking tool is telling us it’s time to ease.
After a recent rough patch due to a multitude of factors (macro driven markets, high correlations, etc.), our domestic Group Selection (GS) Scores started seeing more consistent performance during the fall of 2012. This continued through the first quarter of this year, with the Attractive to Unattractive return spread at +3.0% year-to-date.