Inside The Stock Market ...trends, cross-currents, and outlook

Yields on 10-Year U.S. Treasury bonds sunk to an all-time low of 1.37% on July 5th, yet so far there’s been a mysterious absence of contrarians willing to step up to say that “the” secular low in bond yields is at hand.

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

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While we don’t see a U.S. recession on a one-year horizon, there are a handful of indicators that may force us to revisit that view—including the two relatively obscure data series shown below.

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The S&P 500 once again remains on the verge of a new bull market high, thanks in large part to the bubble in another asset class: Bonds.

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It was thirty-three years ago today that I began my investment career as an equity analyst at The Bankers Life of Iowa (now known as Principal Financial Group). This month, my first as a gainfully employed member of The Leuthold Group’s research team, it seems natural to reflect back as a preface to my new adventure.

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After two rough months moving into 2016, Low Quality stocks rallied and are now leading High Quality stocks YTD. Investors apparently brushed-off the slowdown scare from China, and later the Brexit headlines.

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Validating results of a prior study, a look at the last four MSCI index rebalances shows that stocks soon to be added outperform from Announce Date to Effective Date, while deleted stocks underperform.

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Market classification is an index rebalance on the country level and generally refers to shuffling countries among three baskets: Developed Markets (DM), Emerging Markets (EM) and Frontier Markets (FM).

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We’ve boosted equity exposure twice in the past several weeks, fully cognizant that it’s not a “textbook” time to do so.

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Commentators now label this cyclical advance the “seven-year bull market,” but that won’t be semantically true until the S&P 500 closes above its May 2015 peak of 2130.82.

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Breadth underlying the 4-month upswing has been stronger than that observed during any other rally leg since 2013. Despite just a 14% correction in the S&P 500 from its peak, a new VLT “BUY” signal was triggered. Failed signals are relatively rare, the last one occurred in December 2001.

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We’ve said before that one of Wall Street’s great inventions is the “forward operating earnings” estimate for the S&P 500, because it results in a P/E ratio that invariably sounds reasonable (if not outright cheap). But this already-misleading EPS metric has become even more so in recent years because of the proliferation of non-GAAP “adjusted EPS” reporting practices.

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We’re tactically bullish, but among the twelve “Charts That Worry Us” published in the April Green Book, we’ll concede there are a few that still worry us.

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Following a brief re-admittance to the “Four Percent Club,” the value of Apple declined by the equivalent of one General Electric or two IBMs in the span of just over 14 months.

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The Major Trend Index reverted to its bullish zone in the week ended April 15th, following almost ten months in which the work resided in either neutral or negative territory.

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While our MTI became bullish in mid-April, we can’t rule out that the rebound from February lows could be an impressive bear market rally. However, this rally sports impressive technical credentials.

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While breadth and leadership accompanying the upswing off February lows have been impressive, the most outstanding feature of this advance might be the confirmation provided by high yield bonds.

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Leadership, breadth, and corporate credit all staged intermediate-term breakouts, rising above their respective 40-week moving averages. In this formation, historically, S&P 500 annualized return is +15%.

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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.

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Donald Trump’s all-but-certain Republican nomination is somehow a fitting capstone to a stock market era in which it’s paid to be provincial.

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