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

While our MTI became bullish in mid-April, we can’t rule out that the rebound from February lows could be an impressive bear market rally. However, this rally sports impressive technical credentials.

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While breadth and leadership accompanying the upswing off February lows have been impressive, the most outstanding feature of this advance might be the confirmation provided by high yield bonds.

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Leadership, breadth, and corporate credit all staged intermediate-term breakouts, rising above their respective 40-week moving averages. In this formation, historically, S&P 500 annualized return is +15%.

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Small Cap valuations may look better on a relative price-to-book basis, but we still believe their Normalized P/E ratios will suffer further compression before Small Caps reclaim the leadership baton.

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Donald Trump’s all-but-certain Republican nomination is somehow a fitting capstone to a stock market era in which it’s paid to be provincial.

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The correction failed to meaningfully “reset” any long-term valuation measures, hence, we don’t view the current environment as having much investment merit, but rather, primarily speculative appeal.

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The global economic expansion will enter its eighth year later this summer, yet the world’s central bankers continue to fight deflationary demons as if it’s 2008.

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If this year’s interest in the “Sell In May” phenomenon is any indication, there remains plenty of skepticism surrounding the market’s recent rebound. The good news is that the “Sell In May” play has been weakest during presidential election years.

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Positive forces may be transient. Be wary of EM’s high correlation to commodities and Chinese stocks.

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Two months ago, we suggested a short-term bounce in oil might prove to be the fundamental “hook” that would rationalize a bear market rally. We thought a bounce to $45 might do the trick—and oil futures essentially cooperated, reaching $41.90 on March 22nd.

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The stock market rally off the February 11th lows has been powerful enough to lift the Major Trend Index into its Neutral zone (in fact, a high-neutral ratio of 1.04), and therefore certainly deserves some level of respect.

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If our market disciplines turn bullish in the weeks ahead, we’ll certainly follow that lead—covering remaining shorts, re-establishing a semi-aggressive market position, and wiping egg off our faces for having called a “cyclical bear market” that slammed the Russell 2000 (-26%), EAFE (-26%), and Emerging Markets (-37%)… but somehow not the one most followed, the S&P 500 (-14%).

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We like to think our models and indicators help us preserve a high degree of market objectivity. But sometimes we wonder: the latest rally has progressed to the point where we see trouble afoot in both the strongest and weakest charts we can find.

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Last spring’s “Double Death Cross” in the Dow Transports and Dow Utilities had been partially reversed even before the February low, when the Dow Utilities’ 50-day moving average crossed above its 200-day moving average (thereby issuing a “Golden Cross”). The Dow Transports remain in a bear pattern based on the 50/200-day relationship, but the gap is closing fast.

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A late March issue of The Economist proclaimed “profits are too high” and “America needs a giant dose of competition.”  Funny. NIPA Corporate Profits figures released that week show The Economist’s plea for lower profits had already been fulfilled—and not just in the latest quarter.

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Last month we wrote that a big March gain would trigger a Very Long Term (VLT) Momentum BUY signal on the S&P 500 (Chart). The month’s 6.8% S&P 500 gain wasn’t quite enough to do the trick, but we’re intrigued that VLT did issue BUY signals for three of the market’s cyclical sectors, including Energy, Materials, and Industrials.

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Even though Low Quality spends the majority of time outperforming, investors benefit exponentially from holding High Quality during the bad times.

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Richard Russell—who wrote Dow Theory Letters for almost 60 years before his death last year—observed that “bear market rallies look better than the real thing.”

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The short-term market surge certainly possesses the hallmarks of many previous bear-killers (or correction-killers)…but it also sports the look of many historical bear market rallies.

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Assuming—only for the sake of argument—the bull remains intact, its seventh anniversary will mark a rare case in which the market was lower than at its anniversary a year earlier.

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