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

The stock market generated enough positive evidence by the second week of February to knock us from our comfortable perch on the fence. We covered a portion of our equity hedges on February 12th, bringing net equity exposure in the Core and Global Funds up to 58% from the 50% level that had prevailed since November.

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The bull’s 72-month lifespan now rates as the fourth-longest among all 23 DJIA bull markets since 1900, and the cumulative price gain of +179% ranks sixth.

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Our longer-term bear market forecast and a temporarily positive stock market stance aren’t mutually exclusive.

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Transports now find themselves in a three-month RS downtrend; it’s too early to tell if this is an important message. Leading up to 14 of the last 16 bull market tops, Transports underperformed for a six to 12-month period prior to the final bull market high.

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Mario Draghi will commemorate the global bull market’s sixth anniversary on March 9th with the initiation of a QE bond purchase program of 60 billion euros per month. Our own celebration has been subdued by comparison.

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We wouldn't be surprised if the S&P 500 Financials require a recovery period just as long as NASDAQ's.

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Stock market Margin Debt enjoyed a brief phase of notoriety when it eclipsed its 2007 high just over a year ago, then it retreated into obscurity. Now it may finally be telling us something.

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The Street’s most clever invention is “12-month forward operating earnings” because the stock market invariably appears cheap on the basis of such inflated estimates.

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While we own Apple stock across all of our quantitative long equity strategies, we’ll admit to having mixed feelings when the company shot up to an S&P 500 index weighting of just over four percent last month (4.04%).

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In a cyclical bull market as long and strong as the current one, it’s certainly possible the topping process will be proportionally lengthy and deceptive.

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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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We expect a “garden variety” cyclical bear market to break out this year or early next year and present a chart demonstrating the potential path of decline. In the context of the last two decades’ market action, a decline of this variety does not “look” all that significant.

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While the collapse of Swiss government bond yields into negative territory was January’s bond market stunner, our “G7” composite 10-year government bond yield reached its own milestone when it closed the month below 1.0% for the first time in post-WWII history.

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We’ve been highlighting the overinvestment (or malinvestment) risks in commodity-oriented equity sectors for the past three years, but we certainly did not foresee those risks exploding the way they have in the oil market over the last seven months.

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Weight of the evidence suggests the bull market is in a broad topping process, likely begun in late-July. The duration, however, may be proportionate to the tremendous five-plus year upswing that preceded it.

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Last year will certainly go down as the bull market year in which investors were finally retrained (as they usually are, late in every bull market) to buy the dips. Most of our Attitudinal measures—ranging from option activity and bear fund assets, to surveys of investor sentiment—show retail investors finally shaking off the worry that gripped them for most of the bull market’s first five years.

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We’ve written periodically about the Presidential Election Cycle in relation to stock prices, sheepishly acknowledging both the persistence of the pre-election year effect and its pervasiveness across many markets

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Think the bull market is long in the tooth at almost six years of age? Maybe not.

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