Inside The Stock Market ...trends, cross-currents, and outlook
Still Tracing Out A Top
Major market tops are drawn-out processes that can prove costly, and infuriating, to bulls and bears alike. Younger readers might be surprised to know that was true before Twitter.
Stock Market Observations
It’s telling that the stock market rally off of the Christmas Eve lows—impressive as it was (and, for some investors, painful)—did not manage to lift the Major Trend Index beyond its neutral zone.
“Granddaddy” Tells A Lie
Based on the “granddaddy” of all technical indicators—the daily advance/decline line—we wouldn’t normally be worried that the April 30th high in the S&P 500 could be the final high of the bull market.
Take A Closer Look At “Goldilocks”
We’ve frequently written of the uncanny parallels between the rallies of 2018-19 and 1998-99, but hope that newer readers don’t mistake this analysis as a forecast.
Profits Have Peaked
With the S&P 500 EPS count steadily shrinking and managers getting ever more creative with “adjusted EPS,” corporate profits measured with standardized accounting rules merit a closer look.
Allocation Implications Of Full Employment
While the economy’s move above its full-employment level carries reliably negative implications for profit margins, the impact on equity returns has varied greatly from cycle to cycle.
The Small Cap Discount Deepens
Small Caps typically underperform during a bull market’s final phase, and our findings with respect to the Output Gap aid our understanding of that phenomenon.
Bust To Boom, And Back Again
Last month, we observed that crude oil was the only item propping up broad-based commodity indexes, and that something was bound to give with the U.S. dollar pushing to new highs.
Portraits Of An Out-Of-Sync Market
We suggested many years ago that the final top to this historic bull market would be a long and complicated process rather than a clean and singular event.
Trend: The New Contrary Indicator?
Last month’s market action negated the month-old VLT BUY signals for the MSCI EAFE and Emerging Market indexes.
Time For Dividend Stocks, But Stick With Quality
With multiple indicators flashing signs of an economic slowdown amid trade war uncertainty, investors are betting that an interest rate cut is on the horizon.
Tariff Man Tampers With Toppy Market
Beware of those who write about stock market history, especially when they speak of cause and effect. The truth is that the “why” can never be known.
Divergence, Danger, And Delusion
The U.S. economy and blue chips have shrugged off the risk of the worst trade war since 1930’s Smoot-Hawley Act, while comparatively few stocks on either the NASDAQ or the NYSE have broken out to 52-week highs. There’s also the troubling talk of the Fed having tamed “the cycle.” Should investors bet on a potentially wild (but narrower) final melt-up over the next 6-12 months? We don’t like the odds.
Adding EM On A Rent-To-Own Basis
The Major Trend Index has remained in neutral territory during the last several weeks of upside action, suggesting there remain significant fundamental and technical shortcomings beneath it all. But this precarious MTI stance didn’t preclude us from acting on a new bullish reading for Emerging Market equities at the end of April.
Rally Like It’s 1999
Similarities between 2019’s YTD up-move and the late-2018 recovery are so striking they must make even the most vociferous bear queasy. The trends are identical, but the magnitude of both the absolute and relative performance movements was greater in the earlier experience.
Bull Markets Are In The Eye Of The Beholder
The market’s four-month recovery from the brink of a bear was completed in April, and the ten-year-old bull looks better than ever against all of its post-World War II competitors.
Mixed Monetary Messages
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.
It’s A Confidence Game
U.S. stock funds have seen heavy outflows despite the market’s YTD gains of 15-20%, once again reviving the tired characterization of this bull market as the “most hated in history.”
Commodity Stocks: More Of The Same
Someone forgot to tell commodity trades this is an era of diversity of inclusivity: This year’s leap in the S&P/Goldman Sachs Commodity Index has been entirely the result of its heavily-weighted energy inputs.
AANA: The Good And The Bad
Large Cap U.S. Technology has been the place to be this year, but even an “unmanaged” portfolio with a variety of assets has fared well so far in 2019.
Where Are Yields Headed? Look In The Mirror!
Many economists believe U.S. economic growth will reaccelerate in the second half, sending 10-year Treasury bond yields back above 3% late in the year. A forecasting technique with an excellent record, however, suggests the return to 3% won’t occur until late next decade!
Sell *Beta* In May
The six-month stretch beginning in May generally coincides with a narrow stock market in which non-cyclical and low volatility stocks tend to be the winners. Hence, don’t “sell” in May, but rather, tilt away from beta and away from “breadth.” These seasonal switching strategies have 70% batting averages.
Bank Loan CEFs: Double Leverage Implies Higher Risk
In prior publications we’ve written about corporate leverage, which has risen to an alarming level, and we’re concerned that this could be a trigger for the next market downturn.
1999 Redux
As the market rebound has extended, we’ve noted its striking similarities with the rally of 1999—one that might have been the most speculative in U.S. history.
A Confidence Game
Several consumer confidence gauges plunged in the wake of the Q4 market decline (as expected), and then rebounded in a lagged response to the stock market recovery (again, as expected). But March saw the largest one-month drop in consumers’ assessment of their “Present Situation” since 2008.
BAA Yields: The Baaaad And The Good!
Last fall, we repeatedly noted that low grade corporate credits—measured by Moody’s BAA bond yields—were behaving, well, baaadly.
Inveighing Against The Inversion
Some recent headlines are word-for-word regurgitations of those published in response to the early-2006 yield curve inversion. In that case, the naysayers were temporarily correct, as both the U.S. economy and stock market pushed higher for another year and a half before rolling over.
The P/E Decline Has Been Greatly Exaggerated
The S&P 500 has bounced back to levels seen at the January 2018 spike high, yet is valued more cheaply than it was 14 months ago.
The “Breakout” And Its Aftermath
A common criticism of our long-term valuation work is that valuations shifted north into a new trading range during the 1990s, meaning Leuthold’s benchmarks (dating back to 1957 and earlier) are no longer relevant.
The Cyclical Bull In Perspective
This ten-year boom—one that’s taken the S&P 500 to the second-highest valuations in history—has merely lifted the index to the top end of a channel that’s contained the S&P 500’s 6% annualized gain over the last nine decades.
Bottom-Spotting In Foreign Stocks
The tale of two markets has existed for years, but now it’s getting ridiculous.
VLT & Implications For Small Caps
For much of this decade, we had an allocation preference for Large Caps over Small Caps because of the considerable P/E premium commanded by the latter.
Small Cap Biotech Getting Pricey Again
In May 2015, we warned about rich valuations for small cap Biotech stocks and looked at various ways to evaluate those companies, as the majority have no approved drugs on the market, thus no revenue; therefore, valuing these companies using the conventional methodology is problematic.
‘Green Book’ Wins Best Picture!
We’re almost at a loss for words! But we want to thank our parents, siblings, extended family, an eighth grade English teacher who doubted us for an entire year, and our golden retriever, Miley.
Yet Another Anniversary?
We received two media calls in December hoping we would comment for upcoming special features about the tenth anniversary of the bull market. We rolled our eyes.
Once In A Lifetime?
To paraphrase a talking head and the Talking Heads, someday you might find yourself in a beautiful deleveraging, with beautiful valuations, and you may ask yourself, well, how did I get here?
Same As It Ever Was?
February’s Oscar win validated our efforts to make the ‘Green Book’ suitable for all audiences, like our decision to relegate “bottom-quartile” valuation outcomes to the very back of the publication.
Watch What They Do, Not What They Say
While the celebration over Jerome Powell’s “Christmas Capitulation” lingered throughout February, we’re still awaiting signs the capitulation consisted of anything more than words.
The Correction In Historical Context
While it’s too early to let the ink dry on the accompanying table and chart, we’ve decided to add last year’s decline for comparative purposes.
Time To Jump Back In?
A few pundits have suggested that Jack Bogle’s death in January might prove to be the symbolic capstone to a cycle in which passive investing has completely dominated the full-fee, active money-manager ranks.