The Momentum work has been the largest week-to-week MTI swing factor for many months, and that was the case again last week. The Attitudinal category improved, reflecting increasing investor anxiety.

The latest CPI numbers are slightly lower than market expectations. Oil prices need to be watched closely as further oil weakness would likely drag down inflation expectations too. Concerns about new tariffs causing higher inflation are misplaced.

Late in the cycle, blue chip indexes like the DJIA and S&P 500 can fool investors by hiding subtler deterioration in the broad list of stocks. That’s been underway in the last couple of months, but it’s nothing in relation to the divergence that’s opened in the commodity market, where there’s an almost 20% YTD performance gap between the headline S&P/GS Commodity Index and its non-Energy components (Chart 1).

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.

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.”

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.

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.

Banks’ lending standards for C&I loans (typically to large businesses) tightened quite a bit in Q1, which bodes ill for both investment and overall economic growth going forward.

For the first time since late 2017, Information Technology moved into the top-rated spot. This sector has historically produced especially strong results during periods after which it took over the #1 seat.

Signs of spring are popping up everywhere in the Financials sector. S&P Financials was easily the top- performing sector in April and several sub-industries have been bubbling higher in our Group Selection discipline.

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.

Emerging Market equities have been modest underperformers during the current rally, but they’ve marshaled enough strength to trigger a new low-risk BUY signal on our VLT Momentum algorithm at the end of April.

We are not in the “melt-up” camp but we’re impressed by the close similarities in leadership with the greatest late-cycle melt-up of all time, which took place from late 1998 through March 2000.

Crude oil and the U.S. Dollar Index accomplished a relatively rare feat by moving to simultaneous six-month highs earlier this week (Chart 1).

Although we are not in the “melt-up” camp, we’d concede that stock market leadership is exactly what we’d expect if we were in that camp: Domestic over Foreign, Large over Small, and Growth over Value. Price action continues to remind us of the powerful rebound off the fall 1998 lows. Current earnings and liquidity trends, however, are not nearly as supportive as they were during that historic market move.

The 1999 leadership parallels we discussed in the latest Green Book remain intact—U.S. over foreign, Growth over Value, and Large over Small. Small Caps have given up most of the “beta bounce” enjoyed in the first two months off the December low, with one Small Cap measure—the Russell Microcap Index (the bottom 1000 of the Russell 2000)—undercutting last year’s relative strength low and those of 2011 and 2016.

The Boom/Bust Indicator, a weekly ratio of industrial-commodity prices to initial unemployment claims, has had a near-vertical rebound to old highs in the last several weeks. This index usually peaks out many months in advance of a business cycle peak (although not in 2007, when it provided no warning of the pain to come).

Corporate profits were outstanding last year, but even the benefit of a 40% cut in the top income-tax rate wasn’t enough to lift the net profit margin back to the all-time high of 10.6% established in early 2012. Still, the latest 10.0% figure is more than a percentage point above the 2007 cycle high and about two points better than any other cycle high.

The latest CPI numbers are largely in line with market expectations. The recent rebound in oil prices certainly helped the recovery in inflation expectations. Recent U.S. economic numbers have been decent overall and the latest uptick in the U.S. ISM index also offers support for inflation.

If the market’s manic rebound succeeds in assuaging consumers’ recently shaken confidence, we can certainly see a scenario in which the economy and corporate profits firm up after their current slowdown… although that is not our bet.