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

Stocks might look superficially cheap relative to bond yields, but they continue to offer little appeal in an “absolute” valuation sense.

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We believe the first move toward tighter policy occurred in January when the Fed first reduced the rate of its monthly bond purchases by $10 billion to $75 billion.

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With commodity prices falling in recent months and consumer prices in the Eurozone almost flat over the latest 12 months, we’re surprised that inflation fears continue to climb the list of U.S. investor worries.

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Share repurchase activity in the S&P 500 dropped off in the second quarter, after first quarter buybacks challenged the all-time high levels seen in the second and third quarters of 2007 (a window of history that should ring a bell).

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Surging bond prices in Europe have opened a yield gap with the U.S. This premium favors more dollar strength in the coming months. In equity markets, the short term volatility in the dollar is a mildly bearish signal.

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Statistically, stocks perform a bit better in an environment of dollar strength than dollar weakness. The best stock market action, however, occurs when there’s relative calm in the forex markets.

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While a new secular bear market in commodities commenced in 2011, we still look for tactical opportunities in commodity-oriented stocks to arise from time to time.

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Gold market fundamentals appear superficially bullish...

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We’ve lived through many other low-volatility market rallies, but until the last couple of months we hadn’t experienced one in which clients, colleagues, and commentators were complaining so loudly of boredom.

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Remember that peaks in market breadth tend to lead peaks in the S&P 500 by at least a few months.

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July’s Russell 2000 -6% rout finally deflated some of the Small Cap valuation premium we’ve been grousing about in recent years.

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The United States’ large P/E premium relative to the rest of the world suggests that foreign equities should produce total returns of about two percentage points (annualized) above the U.S. over a seven to ten-year horizon.

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Three months ago, our “Of Special Interest” section reviewed the historically pronounced effect of the well-known “Sell In May” phenomenon during mid-term years of the presidential election cycle.

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We try to avoid the popular practice of “cherry picking” a few indicators to fit our stock market forecast, a reason we evaluate more than 130 measures in calculating the Major Trend Index. But last month we couldn’t resist highlighting the exciting face-off between the professionals and the public.

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We’d rather eat broken glass than have to forecast financial market correlations, but that doesn’t mean we ignore them altogether.

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We slashed the Core Fund’s Emerging Market equity position in 2011, a decision that paid off handsomely until very recently. Is it time to rebuild EM exposure?

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We examine several models or screens to detect accounting or governance risks.

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It’s often said the best bull markets surprise even the bulls, and the current one has certainly done that.

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Current conditions remain cyclically bullish for equities, however, the mathematics don’t support the  “secular” bull market thesis, or those betting that stocks can be propped up by the economic expansion.

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Our Bull Market Confirmation Indicator is tallying a healthy reading. This is intermediate-term bullish, and suggests that a final bull market top should be a minimum of four to six months away.

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