Major Trend Index

The Attitudinal category, which tends to vary inversely with the Momentum work, turned negative for the first time since mid-October, suggesting growing investor conviction that the rally will continue.

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From a Momentum perspective, chart work has improved across the board but much of the longer-term trend work has remained in neutral or bear territory. These measures are, by definition, late at turning points, and we strongly prefer that the “anticipatory” tools within the MTI drive most of the swings.

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The Attitudinal category remains solidly bullish, suggesting there are significant investor doubts surrounding the rally. The market has also absorbed the past few days’ earnings torpedoes fairly well, another sign that expectations are still subdued.

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While growth rates in M1, M2, and MZM appear to have leveled off following their sharp declines over the prior 18 months, the annual rate of decline in the Adjusted Monetary Base (a good proxy for the Fed’s balance sheet) accelerated to almost 12% at year-end from just 3% six months earlier.

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The move off the late-December lows has been broad and powerful but not at all unusual for a countertrend move in a bear market. Since 1945, bear market rallies in the S&P 500 have lasted an average of six weeks and carried the index higher by an average of 10.8%.

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The Attitudinal category’s net reading is the best (i.e., most pessimistic) since the week following the February 2016 correction low. While that’s an encouraging sign, there’s no mechanical threshold on this composite which would indicate a “safe” re-entry point.

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The lack of more meaningful MTI improvement in response to this month’s collapse suggests the bear has yet to fully express himself. But the swipes he’s taken so far have hit hard: Last week saw a nearly 150-point gain in the Intrinsic Value composite to its best level since April 2016.

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The median trailing P/E across the Leuthold 3000 universe has corrected more than 30% from January’s bull market peak (and all-time peak) of 25.1x to just 17.3x on Friday, while the median Normalized P/E ratio has shrunk more than 20% to 22.4x.

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More of our long-term trend-following measures deteriorated to "bear" status, but it isn't unusual for the market to stage a brief countertrend rally when this work becomes as decisively bearish as it is now.

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The Economic/Interest Rates/Inflation category was not a big mover on the week, but its relative stability of late has masked a major shift within key indicator groupings. Leading inflation measures have faded sharply, with upgrades across the board in the commodity readings.

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While the improvement in the fundamental categories is encouraging, the weight of the evidence continues to support a cyclically defensive stance toward the stock market.

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A critical difference we’ve discussed repeatedly is that market overvaluation in the 1999/2000 episode was concentrated in roughly the top-50 Mega Caps, while current overvaluation—though arguably not as extreme—afflicts nearly the entire list of publicly-traded U.S. stocks.

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Although the Intrinsic Value category is now about 100 points above the worst levels recorded in early January, it is far too early to begin making a bullish valuation case for the stock market. Interestingly, some of the same pundits who warned “valuation is not a timing tool” on the way up are the ones trotting out these premature, value-based arguments—which are typically built on extremely-optimistic forecasts for 2019 operating EPS.

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Momentum category collapsed to receive its first negative reading since early March 2016, while the Attitudinal category flipped to net positive ground for the first time in more than 2-1/2 years.

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We believe the catalyst for market weakness has been the decline in accommodation by the Fed and other central banks. While there has been a pullback in some of the leading inflation measures since June, the rate of global tightening has actually accelerated.

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The abrupt decline in the Momentum work reflects deterioration in most trend models, along with bearish flips in the Chart Scores for the Russell 2000, NYSE Financials, KBW Bank Index, and Securities Broker/Dealer Index (XBD). The NYSE Daily Advance/Decline Line provided only limited warning of the impending weakness.

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