Leadership

At the market’s January 27th close, the headline blared, “Russell 2000 Enters Bear Market.” Well, not exactly. If one accepts that a 20% decline constitutes a bear market, then the bear actually began on November 9, 2021—the day after the Russell 2000 peak.

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Technicians are collectively bullish because of the absence of any serious internal divergences. But, severe corrections can erupt with little, or no advance warning from a deterioration in breadth and leadership. In fact, the first few years of the last bull market  provided two such examples (mid-2010 and mid-2011). 

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The bullish consensus seems to be that unlimited Fed liquidity will lift all stock market and economic boats. However, past liquidity floods have tended to lift boats that were already the most buoyant. The “Y2K Liquidity Facility” and last fall’s emergency Fed intervention in the overnight repo market are two cases in which liquidity seemed to flow to where it was needed the least.

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The bull market of 2009-2020 is no longer. But its spirit—its leadership—has somehow lingered, right through the worst of the decline and during the eleven-day, +19% S&P 500 bounce that followed.

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It’s been a while since we looked at 2019’s stock market parallels to 1999. Sorry about that… we’ve been too busy reliving 1999 on almost a daily basis, and often not in a good way. 

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For valuation work, we’ve traditionally favored the 1,200 company Leuthold Small Cap universe over the S&P SmallCap 600 because we get almost a full additional decade of perspective. But figures for the latter shed extra light on just how significant the revaluation in Small Caps has been.

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Value, High Beta, and Small Cap stocks all captured a few rays of sunlight for the first time in a long while. It’s too early to tell if last month’s leadership U-turns can be sustained, but major market trends are the most susceptible to reverse during cyclical bear markets.

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This week’s massive stock market leadership flip has certainly remedied some of the breadth weakness we discussed in this month’s Green Book. But we can’t help wonder whether the move is analogous to performing a transplant on a 95-year-old. The patient might survive the surgery, then die while under anesthetic.

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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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We thought Jerome Powell’s “Christmas Capitulation” would be tough to beat, but he accomplished that two days ago with what could be called his “Spring Surrender.” That, in turn, has rekindled hopes of a stock market melt-up along the lines of 1998-99, which, as old-timers will remember, followed a late-cycle correction that was nearly identical to the one seen last year.

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We’ve written at length about a bear market’s tendency to catalyze major leadership changes—across sectors, styles, and even geographies.

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There’s an old saying that bear market rallies look better than the real thing, yet the upswing off December lows looks even better than the typical bear market rally.

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A bear market will almost always prove to be the catalyst of one or more shifts in long-term market leadership.

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Yes, bulls and bears now hold their respective positions for the same reason—i.e., the U.S. economy is exceptionally strong. The stock market is accommodating this rare bipartisanship with sufficient reason to support either position.

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The Russell 2000 closed above its January 26th high on Wednesday, and well beforehand bulls had seized upon the secondary stocks’ leadership as evidence that all is right again with both the U.S. economy and stock market...

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Ten weeks into 2018, we have already seen three mini-cycles in U.S. equities. A rip-roaring surge in January was followed in early February by one of the shortest corrections in history...

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So, what happened to the January Barometer—the old analyst’s maxim that a market gain in January portends a gain for the full year?

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With the S&P 500 levitating near its all-time high, stock market leadership is peculiar—characterized by a flight to quality. And, despite the market’s violent bounce off February lows, there have been only four new market highs set by key indexes on our “Bull Market Top Timeline” table.

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Based on comparative valuations alone, one could have made a case for investing in foreign stocks over domestic ones as early as 2010—when EAFE’s valuations sunk to an historical low, relative to the S&P 500. Today, that gap remains extreme.

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The stock market rally has carried far enough to flip some of our trend-following work bullish, lifting the Major Trend Index to a low-neutral reading. The improvement prompted an increase in asset allocation portfolios’ net equity exposure to 42% (up from 36% previously).

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