Research.LeutholdGroup

We don’t think the January 15th high will last. What would an intermediate correction - and the ensuing recovery - look like? Correlations are still breaking down but remain high. Stick with industry leaders enjoying “positive feedback”; avoid the temptation to bottom fish among laggard industries. Is Consumer Discretionary at the end of its run? It was a forgettable “Bounce” season. New highs in essentially all U.S. measures undermine the argument from the shrinking pool of secular bears. Group leadership centers on Information Technology, Health Care, and Financials. The Unattractive range is characterized by commodity-oriented groups and high dividend groups. We look at the Systems Software and Consumer Finance groups. Small Caps are back near relative strength highs. Are the emerging markets a value trap? Maybe. But we think the panic in January over their currencies was overdone. The current EM weakness is not yet a full-blown crisis but, if it becomes one, it will drag down developed economies too. The Risk Aversion Index turns up and a new “higher risk” signal. We are turning defensive within fixed income and recommend moving up the quality scale. We expect the 245-250 area to be a strong barrier for the U.S. 10-Year bond.