Relative Strength

Sector swings have been wild enough thus far in 2016 that Consumer Discretionary’s relative weakness has drawn little commentary.

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Last month we noted that European and Japanese banks were among the worst-looking industry indexes among the hundreds we monitor—and both groups obliged by dropping 15-20% in the last month.

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The NASDAQ has solidified its grip on 12-month leadership, rising 11% versus a 4% loss in the NYSE Composite. A surprising feature of NASDAQ’s relative strength dominance is that is has not been accompanied by a rise in relative volume.

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The Dow Jones Transports lagged the market badly again in May, and continues to stand tallest among the red flags we’re now monitoring.

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Emerging Market stocks are probably the cheapest equity subgroup in the world today, trading at 13.0x our 5-Year Normalized EPS estimate—much lower than that of foreign Developed Markets (17.6x) and the S&P 500 (21.3x). But, EM stocks have languished near these valuation levels for almost three years.

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Last year’s economically defensive winners held their grip on stock market leadership in January. This action is consistent with our view that the bull market is an aged, overvalued one that has begun a final “distribution” process that will eventually erupt into a cyclical bear.

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In early October 2014, we noted the momentum reversal of Low Quality stocks and a few signs of the likelihood of transitioning to another phase of the quality cycle. The official numbers of Q4 have confirmed this.

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We are nothing if not contrarians, but have also highlighted the hazards of “knee-jerk” contrarianism—in which investors are instinctively drawn to the asset, sector, or stock that is down the most in price in the recent past.

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Last month’s tactless comments from MIT health care economist Jonathan Gruber contained an (accidental) investment nugget we’ve alluded to several times in the last three years (and, no, it does not relate to the “stupidity of the American voter” or investor).

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We certainly have nothing against dividends, but for more than a year we’ve believed that high-yielding themes like the Utilities, REITs, and the S&P Dividend Aristocrats have become so popular they’re likely to disappoint their new owners for a while.

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Although the social media darlings haven’t recouped their losses, the Technology Index moved to new cycle highs in early June.

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Whether one considers the post-2008 upswing two bull markets or one ultimately matters only to those who (like us) enjoy cataloging such things. But labeling the 2011-2013 rally a new bull market would certainly explain some of the “immature” behavior exhibited by U.S. stocks in recent months.

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Retail stocks barely paused during the September-November market setback, and have lately shot to new all-time relative strength (RS) highs. We were recently asked whether this bullish behavior was effectively an “inoculation” against falling into recession over the near term. 

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Our Stock Quality Ranking work currently shows stocks with low quality rankings outperforming those with high quality rankings.

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Leuthold Stock Quality Ranking work is currently showing that High Quality stocks outperformed during 2011. More upside for High Quality stocks going into 2012?

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Low quality stocks led out of the past bear market, as typically occurs. Despite being the clear winners from the 2009 lows, it looks like the lower quality stocks can continue to outperform given current valuations and momentum.

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Major Trend Index now Positive (both global and domestic). Even though we are bullish, there are several bullish arguments that we still don’t buy.

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The November leg down in stocks was brutal. However, from a technical perspective, the decline was accompanied by the kind of  “positive divergences” that typically appear at major lows.

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Over the last few years, we have been employing a beta adjusted relative strength calculation for high beta groups, along with the traditional relative strength. There are often more revealing signals given by the beta adjusted relative strength, especially in recent years.

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Fundamentals continue to build for technology, but prices yet to react…..Evidence that tech fundamentals are now improving.

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