Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors

As we get further into the era of Trump, it will be interesting to see how the market balances anti-immigration and anti-free trade policies with deregulation and tax reform.

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We had the best figures of the past seven quarters and put some downright awful numbers farther in the rearview mirror.

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After spending the first ten months of 2016 under the long-term median premium of 3%, our Ratio of Ratios has bounced hard the past two months.

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Value stocks reversed long established underperformance to Growth in 2016. However, valuations for these “Value” stocks may have gotten ahead of themselves.

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Let’s think back to February of 2016. Oil was in the high $20’s, people were grappling with the concept of negative interest rates, and banks, especially in Europe, seemed vulnerable once again. Energy, Financials, and Industrials stocks turned a scary start into a respectable year.

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Our “two-month” Up/Down Ratio for Q3 tallies up to 1.37. This is the strongest “two-month” reading of the past seven quarters.

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Robust Small Cap outperformance in November pushed our Ratio of Ratios back to its long-term median—a 3% Small Cap premium.

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Thanks to the November surge in Financials and Energy, Value stocks substantially widened their 2016 performance lead over Growth. This has pushed our L3000 median valuation for Small Cap Value stocks to levels not seen since the late 1990s.

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A yuuuge market sell-off expected from a Trump win was somehow avoided. Instead of lumps of coal, visions of fiscal stimulus and favorable tax policies danced in traders’ heads. As interest rates dashed higher, the market had a very clear picture of who was naughty or nice.

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Our initial Up/Down Ratio for Q3 sports a reading of 1.78. This “one-month” reading is the highest its been in seven quarters.

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Small Caps are selling at a 4% discount to Large Caps. Our Ratio of Ratios logged the sixth consecutive month of Small Caps sitting in the discount zone.

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Growth stocks, especially in the Small Cap tier, received an outsized punishment compared to Value. Looking at historical valuations, Growth remains cheap compared to Value.

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The S&P 500 drifted gently lower in October as election uncertainty crowded out the story of a much better than expected start to Q3 earnings. The S&P 500 closed the month only 3% from its all-time high set in August.

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Our final Up/Down Ratio for Q2 sports a reading of 1.22. As was the case the two previous months, our final number is the highest since the first quarter of 2015.

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Matching our 13-year low made last month, our Ratio of Ratios shows Small Caps at a 6% discount to Large Caps using non-normalized trailing operating earnings.

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Growth remains especially cheap relative to Value in Small Caps and our Royal Blue segment. Small Cap Growth was the best performing segment for Q3 (+9.2%).

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The S&P 500 has quietly put together a string of four consecutive modestly-positive quarters—up nearly 13% for that stretch. Volatility in the most recent quarter was almost non-existent. The only sector not trading with a LTM P/E above its five-year median is Consumer Discretionary.

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Adding in the second month of Q2 2016 earnings, our Up/Down Ratio now sports a reading of 1.23. If we isolate the month of August, it was the best second-month result of the past six quarters.

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Our Ratio of Ratios made a fresh 13-year low in August. Small Caps are now selling at a 6% valuation discount using non-normalized trailing operating earnings.

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Value stocks edged out Growth in each market cap segment. Small and Mid Cap Value remain the best performing segments YTD, up 14.6% and 13.2%, respectively.

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