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

It’s that time of year when we roll out the annual “Playing The Bounce” strategy.

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NIPA earnings (National Income and Product Accounts) were revised downward significantly. Also believe that Small Cap earnings estimates are overly optimistic.

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Our view that the consumer is due for a pullback has been bolstered in recent months, as Consumer Discretionary groups have continued to slip in our Group Selection (GS) Score rankings.

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The YTD net redemptions of $11 billion further substantiate the idea that individuals’ lukewarm aversion toward the U.S. stock market is now turning into full-fledged revulsion.

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Recession risks don’t disappear the day the yield curve rights itself....the “window of vulnerability” extends for quite some time.

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Transparency into the world of the financial derivatives market is notoriously opaque, and the statistics that are available can only offer hints about the level of risk looming over the financial system.

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August was comparable to flying through a category five hurricane, a violent storm with gut wrenching updrafts and downdrafts. The relatively low volume recovery from the August lows has the characteristics of a bear market rally, not the beginning of another major move to the upside.

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Cash takeovers (including private equity buyouts) provided a very conducive environment for the stock market to rise, but there are now signs that this era of endless cheap money available to corporate and private equity buyers could be coming to an end.

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Not even the stock market gymnastics of late-February and March of this year could rival the kind of volatility  we saw in August.

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Because Main Street investors have ignored the U.S. stock market during the recent bull market, they are not a useful contrarian gauge. However, in looking at foreigners investing in the U.S. stock market, we may have identified a new source of contrary behavior.

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August was an incredibly volatile month, and a month which saw the VIX Index explode to the highest level since 2003.

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Many quantitative factors, which had previously shown little correlation, suddenly all moved together.

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There has been a lot of talk recently by PMs and market commentators citing Technology as the place to be. However, when the performance is disaggregated, it becomes clear that this broad sector does not in fact look so good. There are pockets of strength (like the Tech…Big Ten), but our message to readers is be careful.

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The Leuthold Group maintains three short interest models. All three issued timely BUY signals on the market near the summer 2006 lows, but none of these three models provided any hint of the market weakness that recently unfolded in July and August. 

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Steve presents his mid year outlook for “Alternative Investments”

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The yield curve has moved away from inverted status, leading many to conclude the possibility of recession has been avoided. However, a look at past recessions reveals that a reversal of an inversion typically occurs prior to the economic decline– ranging from 6 months to over a year in advance.

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Following the market rout of recent weeks, we imagine there are many clients sharing our nervous view of the stock market. For those clients, especially those managing long-only equity strategies, we thought it may be helpful to highlight some defensive groups that are scoring well in our group work.

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The YTD numbers further advance the notion that Main Street wants little new exposure to the U.S. stock market.

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The Major Trend Index’s bearish reading put us on the right side of the market during the second half of July.

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Deteriorating stock market breadth was one of the factors contributing to the overall decline in the Major Trend Index to Negative status. An examination of the current Advance/Decline Lines shows the fade is continuing, and is particularly prevalent in the small cap indices.

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