A closer look at the dollar’s two main counterparts, the euro and the yen, reveals a regime shift in both cases, but for different reasons.

If interest rates keep going higher from here, we would run the risk of derailing a still-fragile recovery. As long as the Fed tapering uncertainty exists, we expect higher volatility on the 10-year yield to persist in the mean time.

Our AdvantHedge Composite lost 5.9% in July, lagging the inverse performance of the S&P 500 (5.1%), but outpacing both the NASDAQ (6.6%) and the Russell 2000 (7.0%) as the market returned to “risk-on” mode.

Excellent scores in three of six model categories, plus it offers plenty of market cap and low beta relative to other Health Care groups. We think it will benefit from broad, long-term industry trends.

Attractive valuations, improving growth and technical strength are the key drivers. The group offers an opportunity to participate primarily in the overall growth of computing devices.

But Information Technology rises to the top of the Domestic model, while the trend of Financials domination in the Global model remains intact.

 Health Care Distributors and Electronic Manufacturing Services were both added to the portfolio this month.

Group Deactivations: Oil & Gas Refining & Marketing was deactivated.

The S&P 500 gained 4.9% (price only) in July. Based on the valuation metrics presented in the table below, the S&P 500 is 12% above its historical average. S&P Industrials (excludes Utilities and Financials) now have 21% downside to reach mean valuation.

There are some substantial deviations in sector performance depending on your constituents and weighting scheme while, simultaneously, betas are converging toward one another.

The relationship between U.S. Treasury bond yields and the relative performance of cyclical stocks versus their defensive consumer counterparts appears to be changing.

Funds of funds, particularly target date funds, are growing rapidly and are now large enough to have a measurable impact on underlying fund flow trends.

Despite rising market volatility, Low Quality stocks ended Q2 up 3.8%, slightly better than High Quality’s 3.4% gain. YTD, High Quality stocks are up 14%, just behind Low Quality stocks at +16.6%.

Gold’s recent weakness may be more ominous for industrial commodity investors.

With the notable exception of the Consumer Discretionary sector, cyclical stocks topped out globally on a relative basis in early 2011 (Chart 3). Throughout the last two and one half years, there have been repeated calls for industrial cyclicals—which were, of course, the leaders of the last cyclical bull market—to reassume stock market leadership.

Deteriorating Technicals drove the move to Neutral, but a new positive reading in the Attitudinal category gives some hope to the bulls.

Today may feel different, but it isn’t. The past 13 months’ trading action in the U.S. is the second example of this phenomenon in the current (2009-to-date) cyclical bull market. We focus on 11 previous episodes for perspective. Plus we clarify recent thoughts on interest rates and stock market valuations.

In Q2, the Low P/E Tier was the best performing subset, up 5.8%. In 2012, the Middle Tier led with a gain of 19.7%, versus +16.2% for the High Tier and +12.2% for the Low Tier.

Was the brief taper-induced pullback a sign of what’s to come down the road?  If so, we looked at what factors performed well and what factors didn’t in response to the rising rate environment.