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

There are four key decisions a company’s management has to make: Dividend Policy, External Financing, Capital Expenditure (Capex), and Research & Development (R&D).  We studied how the market rewards each of these management decisions.

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Climbing the bull market stairs. Our initial upside price target for the S&P 500 is 1300 to 1350. This is based on normalized P/E ratios moving to prior bull market average peak levels, as well as on past market peaks.

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Market breadth has weakened considerably, which has historically been a big negative for stocks. However, the lead time between peaks in market breadth and eventual bull market peaks are long and variable.

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Current market is closely aligned with the 1973-1974 post bear market recovery. Expect to see series of higher lows before market ultimately makes new high.

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There is a potential valuation ceiling confronting U.S. stocks. 2002 S&P valuation lows may be the point that this cyclical bull market tops out.

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What will be one of the key performance drivers for  the second half of the bull market? The short answer is the same catalyst that brought the stock market down during the latter half of the last bear market: Liquidity.

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Return On Equity (ROE) has been performing well as a quality factor on a global basis over the last six to twelve months.

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And now our final new analyst introduction (for the time being) of Chun Wang.

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There’s an overwhelming consensus that the U.S. economy has slipped into a long-term phase of declining growth in real GDP and chronically higher unemployment. Here’s a dissenting opinion from a client, along with Steve Leuthold’s response.

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The “easy money”—at least psychologically— may still be ahead for some. Money continues to move out of U.S. equity mutual funds, and there is still skepticism about the stock market.

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Continuing our series of introductions of new members of the Leuthold team, this month we present our token New Yorker and bottom up Clean Tech stock picker David Kurzman.

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Following a strong September, October may be a little weaker. However, readers should use any October scare to buy equities in anticipation of strong end to 2009.

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Secular versus Cyclical markets. It shouldn’t really matter. Investors can lose a lot waiting to be right. The Key is to focus on the cyclical movements within a secular bull or bear market.

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Most stocks, especially low quality stocks, have already bounced so there will be no Playing The Bounce strategy this year.

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As of the end of Q1, the 20 year total return ACR differential between the S&P 500 and Ten Year Treasuries was negative, and at its lowest reading in 60 years.

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As one of the oldest investment philosophies, value investing has certainly stood the test of time. The recent market meltdown is no exception.

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Most quantitative portfolio managers employ some variation of the momentum strategy, and most have had a hard time with this particular strategy since the end of 2007.

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Doug Ramsey demonstrates that new bull markets can be expected to correct by 10% or more at some point — which may be why so many pundants are looking for a correction now. Past history shows that based on duration it would be early in the current bull market for a correction at this time, but based on  magnitude, the timing would be about right.

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Our first introduction is of Jun Zhu, who broke the mold by not being another white Midwestern guy.

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Market vacuum occurred during the 4 weeks following the collapse of Lehman Brothers, when the S&P 500 dove from 1250 to 900. This occurred during the recession, but it has been the Retailers that are among the few groups that have closed that gap.

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