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

In Q2, NIPA’s EBIT margin fell to a new four-year low, over one point below the early 2012 cycle peak.

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One of the drawbacks advantages of tracking so many market indicators is that one can invariably cherry-pick a single measure that supports a given narrative.

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MSCI will soon announce the results of its semi-annual index rebalance and, for the first time, overseas-listed Chinese companies will be included in the MSCI Emerging Market and China Country Indexes.

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A strong dollar and low commodity prices are major forces dragging down EM currencies across the board.

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Major Trend Index remains decisively negative at 0.72. The “market action” category is the primary culprit behind this bearish tally, but we’ve also seen the Economic category deteriorate in recent months and would expect this trend to continue. This sequence is typical: Market action leads economic trends (and, we would argue, is a major cause of those trends).

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The August market break did not emerge from out of the blue. The foundation for the bear case was put in place many months before those four ugly days in late August.

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We reviewed 100 years of evidence for the Dow Jones Industrials Average and found no compelling evidence for a “bounce” effect. Contrary to expectations, fourth quarter Dow performance has (on average) been stronger when the index has already booked a gain through the first nine months.

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It’s been more than two years since NYSE Margin Debt broke out above its 2007 high, and we remember the rash of bearish commentary that accompanied that milestone. We later showed the Margin Debt increase was almost perfectly proportional to the gain in the stock market itself, and not a reason to turn bearish in and of itself. But our tune has changed.

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Foreign valuations experienced nowhere near the expansion enjoyed by U.S. stocks during the latest bull market, but their cheaper valuations rarely seem to inoculate them from outsized losses during corrections and bear markets.

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We wrote in the January book that 2015 would serve up no shortage of excuses for the Fed to hold off on tightening all year. Whatever window the Fed may have had is now closed.

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Corporate profits are notoriously cyclical, and for decades we’ve sought to temper their swings by using a five-year smoothing of S&P 500 EPS in our valuation work.

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While NIPA profit margins peaked nearly four years ago, median margins across the S&P 1500 (and particularly within the S&P 500) managed to hold up until just the past three quarters. But it now looks as though the long-awaited margin squeeze is finally underway.

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The traditional economic indicators are no longer as relevant as people think, and China’s condition may not be as bad as most fear.

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On a relative basis, High Quality Stocks lived up to the reputation of providing a safe haven.

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Among the various arguments put forward by those believing the recent decline is no more than a correction, the most difficult for us to address is the common claim that “there’s no recession on the horizon.”

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When the “most hated bull market on record” finally suffers a steep decline, it’s reasonable to expect that the hatred might evolve into true revulsion.

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