Research.LeutholdGroup

There’s an old saying that bear market rallies look better than the real thing, yet the upswing off December lows looks even better than the typical bear market rally.

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We wrote in the January Green Book that the S&P 500 Christmas Eve low did not have the “right look,” in that: (1) there had been no sign of “smart money” accumulation beforehand; and, (2) downside momentum was also at a new low for the entire correction. Smart money buying is measured by the Smart Money Flow Index, which evaluates trends in first half-hour market action (considered to be more emotional and news-driven), and the last hour of trading (viewed to be more informed and institutional in nature).

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The S&P 500 has again shown its mysterious ability to defy the conventional bear market threshold, with the decline into its Christmas Eve low becoming the fourth one in the last 30 years to halt just shy of the magic -20% figure.

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Investors have just suffered a negative wealth effect that will likely work to tamp down inflation over the next year.

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It’s been one of the worst years on record for diversification, with our hypothetical All Asset No Authority (AANA) portfolio down 7.2% YTD through yesterday. That’s the second-worst year for AANA since 1972, and there’s probably not enough time left for performance to undercut 2008 (-24.9%) for the bottom spot.

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Headlines surrounding the U.S. housing market have recently fixated on sputtering home sales; declining affordability, thanks to the combination of rising mortgage rates and sky-high home prices, is to blame.

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A massive drop in corporate tax payments lifted the third quarter NIPA profit margin back to the 10% level for the first time four years. But while we try not to always view the glass as half empty, we find it troubling that margins remain well-below their 2012 highs (10.6%) in spite of this one-time windfall.

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Whatever one’s preferred leftovers from yesterday’s feast, the odds are good you’ll find them more appetizing than the slop served up by global asset markets this year. Stocks have obviously been turkeys, but all the surrounding trimmings that help diversify a portfolio have proven anything but complementary to the main course.

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While the consensus view remains that October’s stock market rout was “healthy” and “overdue,” we think it was  more likely the first leg down of much larger decline. But it’s still worth reviewing the improvement in valuations that market losses and this year’s excellent fundamentals have combined to produce.  

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In the March Green Book, we discussed the long history of stock market difficulties during mid-term election years. Incredibly, nine of the past 11 cyclical bear market lows have occurred in these years, with eight of those nine recorded during the seasonally-weak months of May through October (Table 1).

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During the stock market’s protracted retracement of its January/February decline, we speculated a few times that the final outcome might look similar to the bull market tops of 1990, 2000, and 2007.

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Our tactical accounts remain positioned very defensively, and we have yet to see the sort of capitulative market action that would lead us to lift any existing equity hedges.

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Momentum is one of the most successful investment styles over the long run, and does particularly well in the later stages of a bull market during the run-up to an eventual peak.

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We think the odds are better than even that the September 20th S&P 500 high will stand as the stock market high for 2018, and perhaps also as the high for a historic event begun back in 2009. We’re well-prepared for that possibility, with the Leuthold Core now positioned today with net equity exposure of just 37%.

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In recent commentaries, we’ve highlighted the surprising number of U.S. stocks making 52-week lows on both a daily and weekly basis, a sign that the market’s push higher has become more fractured. While pondering the significance of those lows, however, we missed a new 52-week high last Friday in a series we think will be especially critical to the stock market’s near-term fortunes: the 10-year U.S. Treasury bond yield. Specifically, the yield matched its weekly closing high of 3.07% posted on May 18th.

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The S&P 500 reported blockbuster earnings growth again in the second quarter of 2018. With the corporate tax cut boosting profits this year, we were curious to know how much of the improvement was tax driven and how much was due to the exceptionally strong economy.

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In the past year, big-name bond gurus have put forth various yield targets that, if exceeded, would provide definitive proof that the secular bull market in Treasury bonds begun in 1981 had finally ended.

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Trying to monitor the dozen or so regional purchasing-managers’ surveys released prior to the monthly national report  invites a perpetual case of whiplash...

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The S&P 500 has closed within a half percent of an all-time high three times this week, and the S&P 1500 Composite did make such a high on Tuesday, August 21st...

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“That which does not kill us, makes us stronger” might be a good motto for this never-ending bull market. The bull continues to shrug off the effects of both Quantitative Tightening and an escalating trade war, and it’s doing so during a seasonal stretch in which many of its predecessors have sunk to their knees (if not their demise).

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Our ongoing research into the relative performance of Active vs. Passive fund styles is based on the belief that just as market conditions cycle, so does the active-passive return spread.

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For the last year, we have labeled the S&P 500 Price/Sales ratio—which has returned to its Y2K bubble levels—the “scariest chart in our database” (Chart 1). Recall that the initial visit to present levels was followed by the S&P 500’s first-ever negative total return decade.

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Yesterday was the six-month anniversary of the S&P 500 bull market high, and the index celebrated the event by nearly setting a new peak. Meanwhile, the S&P 500 Total Return Index did make a new high on Wednesday.

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While momentum has been the best-performing stock selection factor in 2018, there’s a less well-known and purely fundamental factor that rates almost as well: A company’s ability to lose money!

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We have recently been struck by the tremendous valuations being awarded to companies that have never turned a profit. Tesla, Spotify, Workday, and Square all sport market caps above $25 billion based not on their recent earning power (which is zip), but on the hopes that they will one day move well into the black.

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The stock market liquidity squeeze we’ve discussed this year hasn’t played out quite like we expected. Traditionally, Fed tightening and slowing money growth hit Small Caps earlier, and harder, than the blue chip stocks...

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An important feature of this bull market—and a reason for its longevity—is the slow recovery in investor attitudes relative to valuation altitudes...

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Annual Producer Price Inflation rose to 4.0% in May, a key threshold above which the S&P 500 has historically delivered essentially flat returns. But the fact that this reading occurs against a backdrop of full employment is cause for even more concern. Context is key...

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Tomorrow is the Minnesota season-opener for muskies, but the fanatics who chase them are likely disappointed that it comes a few days after an event that’s known to trigger these beasts: the full moon. The screenshot is from our $9.95 “iSolunar” iPhone app, and shows that Saturday merits only a “three fish” day (out of a possible “four fish”)—based on the moon’s fading illumination. 

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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 Russell 2000 closed above its January 26th high on Wednesday, and well beforehand bulls had seized upon the secondary stocks’ leadership as evidence that all is right again with both the U.S. economy and stock market...

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The 2017 run that pushed the nine-year bull market to all-time highs made it very difficult to find anything that looked cheap, and few choices that looked average. Even the Tech bubble of 1999 allowed investors to find moderately priced stocks among the mundane old-economy companies...

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In difficult markets, we have become more appreciative of some of life’s small gifts. For example, it’s been quite a while since we’ve heard it argued that this is “the most hated bull market of all time.”

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Athletes aren’t the only ones known to sometimes suffer a “sophomore slump.” Presidents do, too… at least according to the historical verdict of the stock market...

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Analysts are still coming to terms with the impact of the big corporate tax cut, as shown by the dispersion still existing across S&P 500 EPS estimates in 2018. But they should also be watching the line item that’s contributed the most to the breakout in profit margins above historical levels: interest expense...

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Yields on 10-year Treasury bonds have still not breached the 3.00% level that many believe will stick the proverbial “fork” in the secular bond bull market that began in 1981. That could well in happen in the next few weeks, but we believe it’s important to step away from the daily fray and reflect upon the damage that’s already been done.

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The Major Trend Index fell into its negative zone last week and we trimmed the already below-average net equity exposure in tactical accounts by a few more points, to a current 41-42%.

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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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After a brief respite last year, EAFE has reverted to its old form by falling 300 basis points behind the S&P 500 so far in 2018. EAFE’s main transgression might simply be that it represents good relative value in a market that’s been rewarding only momentum...

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Ten weeks into 2018, we have already seen three mini-cycles in U.S. equities. A rip-roaring surge in January was followed in early February by one of the shortest corrections in history...

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