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

The breadth of new market highs across multiple market indexes illustrates beyond a doubt that the stock market is “externally” in gear, but some analysts contend the market is showing “internal” signs of weakness.

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Two short-term, options-based sentiment measures have just swung to levels consistent with near-term difficulty for stocks. Current reading is the most bearish combination of smart-money caution and dumb-money confidence in 10 years.

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We’re still bullish, but nonetheless feel a duty to take issue with some of the popular story-lines that have attended the past two years’ rising prices.

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We’ve been negative on commodities and most commodity-oriented equities for the last three years, believing that the magnitude of the ramp-up in commodity production capacity over the last decade remains generally underappreciated by investors.

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We certainly have nothing against dividends, but for more than a year we’ve believed that high-yielding themes like the Utilities, REITs, and the S&P Dividend Aristocrats have become so popular they’re likely to disappoint their new owners for a while.

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Small Caps have staged a nice rebound in the last several weeks. On July 3rd, the Russell 2000 rose to within a fraction of an index point of its March 4th all-time high. But on a relative strength basis, the bounce has been pretty muted.

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Low Quality Momentum persists, and a look at how Valuation factors affect the Quality model output.

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Great bull markets begin with numbers but end with narratives. The current bull market began with terrific statistics, but the past two years has given way to story-telling that is unimaginative even by Wall Street standards.

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While stock market action YTD has not been quite as “uniform,” the hallmarks of an imminent bull market top are simply not present. The bullish portents apply to intermediate term results, however, they cannot rule out any short-term setbacks (which can appear with no tip-off from breadth or leadership measures).

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Daily stock market volatility has levitated at levels a bit higher than the VIX—in a zone that has historically been “optimal” for short-term performance.

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The notion of “overbought” and “oversold” markets might be the costliest concepts ever developed by stock market technicians. The very words imply some sort of excessive condition that’s prone to naturally self-correct.

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Although the social media darlings haven’t recouped their losses, the Technology Index moved to new cycle highs in early June.

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Five springs ago, we couldn’t have imagined we’d still hold near-maximum equity exposure after a near-tripling in the stock market from its Great Recession low. Then again, we wouldn’t have guessed that Fed printing presses would still be whirring so many years after the crisis ended. Coincidence? Probably not.

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The year’s second biggest surprise (next to the relentless drop in bond yields) might be the YTD bounce in the major commodity indexes.

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A good rule of thumb for fundamental forecasters is that projected events almost invariably take much longer than anticipated to occur, but then—once underway—unfold with much greater speed and power than originally expected (think subprime).

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Timing a dividend strategy based on interest rate trends is futile. Look for quality of dividend payers for long-term success.

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Small Cap weakness has many concluding that the terminal distribution phase is underway. We think that is a stretch.

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DJIA eclipsed its year-end closing high; Dow Transports still strong; NYSE A/D Line hits all-time high.

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With Small Cap stocks falling to an 11-month RS low while the DJIA hits a new price high, many technicians point to this divergence as evidence the dangerous "distribution" period is underway. We're not so sure.

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