Research.LeutholdGroup

The need to sound contrarian has become a borderline obsession among market pundits. Media opportunities for talking heads have exploded in the last decade, forcing those who hold the safest consensus views to falsely portray themselves as lonely and misunderstood market mavericks.

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Rather than stocks disconnecting from the economy, as some equity bears contend, we see the blue chips disconnecting from the rest of the market. The underperformance of leading groups, along with multimonth divergences in momentum, bullish sentiment, and credit spreads are all consistent with the deteriorating prospects for earnings and the economy.

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We’d concede the monetary backdrop for stocks is now mixed, an upgrade from the almost uniformly negative environment of last fall. On the negative side, the U.S. yield curve inversion has now persisted long enough that even the economic optimists are getting nervous.

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The early August setback took the S&P 500 below its late-January 2018 high—and the time when we first trimmed net equity exposure in Leuthold tactical funds from a nearly fully-invested posture.

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Earnings results for the second quarter have so far "beaten" expectations (as they always seem to), but that hasn’t changed the calculus for Small Cap companies. About one-third of them have negative earnings over the last twelve months.

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Trend followers who use the ten-month moving average discipline finally had a positive month in July. But after the early-August decline, they are still holding an S&P 500 loss of 60 points from their latest trade initiated at the end of June.

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While re-leveraging of the U.S. corporate sector during this economic cycle has been well-documented, the common belief is that the consumer balance sheet remains in good shape. That’s technically true.

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For at least two years, the unofficial title of “the scariest chart in the Leuthold database” belonged to the S&P 500 Price/Sales ratio. That chart still rattles us, with the July month-end ratio still in the vicinity of its old Y2K high.

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Here are some brief follow-up notes on topics covered in recent months’ Green Books.

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The 2.00%-4.99% yield range is the sweet spot for yield investors from a risk/reward standpoint; while the other end of the spectrum (>5% yield) incurs too much risk for the fat payouts. Here we spotlight four ETF strategies that focus on dividend paying stocks.

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The S&P 500 has rallied 9.2% in the 22 trading days since its June 3rd low, but the move hasn’t (yet) been enough to lift the Major Trend Index out of its negative zone.

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Over a 12-month horizon, we now believe a U.S. recession is very likely, but aren’t confident enough to make the call when the forecast window is cut in half. Second-half stock returns could be decent if the business-cycle peak is still a year away. Then again, there’s peril in waiting for “too much” confirmation of recession.

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The granddaddy of all technical indicators—the NYSE Daily Advance/Decline Line—continues to make new highs alongside the S&P 500, suggesting the market should move to even higher (but perhaps narrower) highs well into the fall. As noted a month ago, we increasingly suspect that granddaddy may be telling a lie.

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The 10-year-old bull grabs most of the headlines, but its younger sibling has begun to command more respect.

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Current leadership trends continue to track their 1998-99 behavior in an almost eerie fashion—so much so that we now wish we’d used that historical period as our instruction manual!

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One of the more impressive feats that bullish pundits have pulled off is their successful portrayal of themselves as lonely and misunderstand contrarians even as the eleventh year of a cyclical bull market grinds on.

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Many technicians consider the 10-month moving-average crossover technique as the gold standard among long-term timing practices. The method was successfully applied to several asset classes in the SSRN’s most-downloaded paper of all time, “A Quantitative Approach To Asset Allocation” by Meb Faber.

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We’ve never understood investment quants’ desire to project correlations among assets. Such correlations are inherently unstable.

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Last month we noted that current interest-rate expectations might indicate good timing for dividend investments; however, we strongly suggested being selective, and lean toward high-quality dividend payers.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Last month’s market action negated the month-old VLT BUY signals for the MSCI EAFE and Emerging Market indexes.

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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.

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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.

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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.

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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.
 

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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.

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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.

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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.

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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.”

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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.

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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.

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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!

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