Inside The Stock Market ...trends, cross-currents, and outlook
Summer Trouble?
New late-June highs in NASDAQ, Small Caps, and key Financial groups weren’t enough to stem the past few weeks’ slide in the Major Trend Index, which has landed back in its neutral zone (1.01 reading).
A BUY Signal That Says SELL?
Last month we discussed the negative market implications of May’s “Death Cross” signals in the Dow Transports and Dow Utilities.
A Page For The Bulls
One could conceivably argue the market is still “cohesive” enough to hold together for awhile longer. June 23rd saw closing bull market highs in the NASDAQ, Mid Caps, Small Caps (both the S&P 600 and Russell 2000), and the critical KBW Bank and NYSE Arca Broker/Dealer Indexes.
NASDAQ Apathy?
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.
Beware The New ‘Wall Of Worry’
The Volume Oscillator discussed in this section is one of several encouraging developments within our Attitudinal work that has sent that category to its least negative reading (-57, Chart 1) since July 2013.
A Venerable Monetary Indicator Turned Negative
The smoothed, 26-week rate-of-change in the DJ Corporate Bond Index, a reliable indicator of monetary conditions over many different market and economic cycles, turned negative in mid-June.
Leadership: Winning Begets Winning
Many assume that stocks and industries exhibiting high price momentum suffer disproportionately during the eventual bear market. Surprisingly, the high momentum stock portfolio has suffered an average bear market loss that’s about a quarter less than that of the low momentum portfolio.
Oil Prices And VLT
Energy groups continue to rate poorly in our quantitative work, but change will probably be afoot in the second half.
What’s Next For The Dollar?
The U.S. Dollar Index has recovered about half the losses from a two-month, -7% setback from the 12-year peak it established in March.
A Kind Word For “Forward Earnings”
Our criticism of the widespread trust in “forward earnings” has sometimes been harsh, but consider the following: the latest 12-month forward EPS estimate for the EAFE index is $122.71, virtually matching the forward estimate that was made in January 2006.
“Index Rebalance Effect” On Stock Performance
Stocks selected for inclusion in the MSCI ACWI have outperformed from the day of the announcement to the day of implementation, while the opposite is true for stocks which are removed. Long-term, however, stocks included in the index do not outperform compared to those that were removed.
High Quality Outperforming, But Valuations A Concern
High Quality stocks had another winning quarter on a relative basis returning +0.1% in Q2, while Low Quality stocks lost 2.8%. Small Cap High Quality stocks also beat their counterparts.
Don’t Fight The Fed?
While our stock market disciplines (including the Major Trend Index) are nominally bullish, we’re mentally gearing up to do something in the near future that was once considered ill-advised: Fighting the Fed.
Another Retrospective On The Bull…
Up front, we need to remind readers that the Major Trend Index is bullish at 1.08, and our tactical funds remain well-exposed to equities with net exposure of 60-61% (versus a range of between 30% minimum up to a maximum of 70%). That being said, we’re focused on the likelihood of a major defensive portfolio move in the near future, which probably comes as no surprise to Green Book readers (...what with us publishing a prepackaged obituary for the bull market just a month ago).
Transports Still Troubling
The Dow Jones Transports lagged the market badly again in May, and continues to stand tallest among the red flags we’re now monitoring.
The Double Death Cross!
The Dow Transports and Dow Utilities both triggered major sell signals in May when their 50-day moving averages fell below their 200-day moving averages… known by some as a “Death Cross.”
Two Takes On Market Breadth
Market technicians continue to argue that a bull market peak is unlikely to form with the majority of U.S. stocks (and global ones, for that matter) still participating in the new highs of the blue chip indexes.
Stock Market Valuation Check
It now goes almost without saying that whenever the stock market moves to a new cycle extreme, so does the MTI’s Intrinsic Value category. In late May, this reading dropped below –400 for the first time in this bull market, and is now within 150 points of its 2007 extreme.
Yet Another All-Time High...
It’s generally a bad idea to roll out new valuation readings that one doesn’t fully understand late in a cyclical bull market. But we’re going to do it anyway, recognizing that a similar practice proved to be the undoing of dozens of fund managers and Tech analysts at the turn of the millennium.
What’s In Store For The Secular Bull?
Last year seemed to cement the view that stocks have entered a new secular bull market, and today we’re not going to offer our dissent—what with the S&P 500 trading about a third above its 2000 and 2007 “Twin Peaks”.
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