The Major Trend Index pushed further into bullish territory based on data through last week, rising 0.09 points to a three-year high 1.22 ratio. Improvement in both the Momentum and Economic categories drove the gain. In addition, there were positive developments based on yesterday’s month-end prices that will be captured in the next MTI reading.

Inflation exceeded expectations in April. The more durable inflation measures such as wage inflation are also improving. We characterize the recent improvement in inflation as a relief from the threat of deflation but still quite far from being a catalyst for run-away inflation.

If this year’s interest in the “Sell In May” phenomenon is any indication, there remains plenty of skepticism surrounding the market’s recent rebound. The good news is that the “Sell In May” play has been weakest during presidential election years.

Small Cap valuations may look better on a relative price-to-book basis, but we still believe their Normalized P/E ratios will suffer further compression before Small Caps reclaim the leadership baton.

Despite recent improvement in some inflation measures, we are not convinced the war against disinflation has been won. The risk of being too early on the inflation call far outweighs the risk of being too late.

We recently purchased the Building Products group in our Select Industries Portfolio. Strong trends in existing U.S. home sales and the remodeling market, coupled with slow but steady growth in new construction, should bode well for future Building Products group performance.

S&P 500 profit margins mask the disparate trends taking place on a sectoral level. We dissect those trends with the ten major sectors grouped by five broad themes: Cyclicals, Commodities, Defensives, Interest Sensitives, and Tech/Telecom.

Inflation missed expectations in March.  The three key inflation drivers this year - oil, the Dollar and the Chinese yuan, are all going in the right direction.  The risk of being too early on the inflation call far outweighs the risk of being too late.  Patience is still recommended.

Even though Low Quality spends the majority of time outperforming, investors benefit exponentially from holding High Quality during the bad times.

Last spring’s “Double Death Cross” in the Dow Transports and Dow Utilities had been partially reversed even before the February low, when the Dow Utilities’ 50-day moving average crossed above its 200-day moving average (thereby issuing a “Golden Cross”). The Dow Transports remain in a bear pattern based on the 50/200-day relationship, but the gap is closing fast.

The current environment will likely persist longer than most expect which will put further downward pressure on profit margins. As margins come under pressure, companies increase leverage to prop up ROE. However, the market wants higher duration, not higher leverage.

Group Selection (GS) Score strength among insurance-related industry groups has been a long-running theme within our quantitative framework.

We have mentioned a number of times that China had experienced a very unpleasant “second-hand” tightening due to its peg to the dollar. Its trade competitiveness has suffered tremendously. With a weaker dollar the Chinese Yuan can re-gain some of its competitiveness while maintaining its peg to the dollar. A rare win-win in today’s convoluted world of finance.

Inflation met or modestly exceeded expectations. The three key drivers for inflation (oil, the Dollar and the Chinese yuan) continued to improve. But we are not rushing to declare victory on disinflation. “Organic” inflation, such as sustained wage inflation, has been very elusive so far.

The short-term market surge certainly possesses the hallmarks of many previous bear-killers (or correction-killers)…but it also sports the look of many historical bear market rallies.

Relative valuations of Staples and Utilities sectors already reflect a “flight to quality” effect. Investors looking to add some economic/stock market defense should focus on the cheaper Health Care groups.

YTD the S&P 500 has fallen 2% while the S&P 500 Banking industry group is down over 12%—a shortfall that has the attention of value investors and contrarians seeking a chance to buy high-quality banking franchises at fire-sale prices.

New developments have lifted sentiment toward oil and Energy names, but we caution bottom-fishers to be mindful of risks. The fundamentals in the oil patch do not yet support strong oil prices going forward.

We see solid prospects for potential industry growth; consolidation and a full-blown industry evolution have resulted in group constituents having more in common than ever before.

We use our Group Selection (GS) Scores to identify the potential for a catalyst, and to gauge the health and future performance potential of those groups out of favor by analysts.