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

Statistically, stocks perform a bit better in an environment of dollar strength than dollar weakness. The best stock market action, however, occurs when there’s relative calm in the forex markets.

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While a new secular bear market in commodities commenced in 2011, we still look for tactical opportunities in commodity-oriented stocks to arise from time to time.

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Gold market fundamentals appear superficially bullish...

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We’ve lived through many other low-volatility market rallies, but until the last couple of months we hadn’t experienced one in which clients, colleagues, and commentators were complaining so loudly of boredom.

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Remember that peaks in market breadth tend to lead peaks in the S&P 500 by at least a few months.

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July’s Russell 2000 -6% rout finally deflated some of the Small Cap valuation premium we’ve been grousing about in recent years.

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The United States’ large P/E premium relative to the rest of the world suggests that foreign equities should produce total returns of about two percentage points (annualized) above the U.S. over a seven to ten-year horizon.

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Three months ago, our “Of Special Interest” section reviewed the historically pronounced effect of the well-known “Sell In May” phenomenon during mid-term years of the presidential election cycle.

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We try to avoid the popular practice of “cherry picking” a few indicators to fit our stock market forecast, a reason we evaluate more than 130 measures in calculating the Major Trend Index. But last month we couldn’t resist highlighting the exciting face-off between the professionals and the public.

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We’d rather eat broken glass than have to forecast financial market correlations, but that doesn’t mean we ignore them altogether.

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We slashed the Core Fund’s Emerging Market equity position in 2011, a decision that paid off handsomely until very recently. Is it time to rebuild EM exposure?

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We examine several models or screens to detect accounting or governance risks.

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It’s often said the best bull markets surprise even the bulls, and the current one has certainly done that.

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Current conditions remain cyclically bullish for equities, however, the mathematics don’t support the  “secular” bull market thesis, or those betting that stocks can be propped up by the economic expansion.

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Our Bull Market Confirmation Indicator is tallying a healthy reading. This is intermediate-term bullish, and suggests that a final bull market top should be a minimum of four to six months away.

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The breadth of new market highs across multiple market indexes illustrates beyond a doubt that the stock market is “externally” in gear, but some analysts contend the market is showing “internal” signs of weakness.

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Two short-term, options-based sentiment measures have just swung to levels consistent with near-term difficulty for stocks. Current reading is the most bearish combination of smart-money caution and dumb-money confidence in 10 years.

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We’re still bullish, but nonetheless feel a duty to take issue with some of the popular story-lines that have attended the past two years’ rising prices.

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We’ve been negative on commodities and most commodity-oriented equities for the last three years, believing that the magnitude of the ramp-up in commodity production capacity over the last decade remains generally underappreciated by investors.

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We certainly have nothing against dividends, but for more than a year we’ve believed that high-yielding themes like the Utilities, REITs, and the S&P Dividend Aristocrats have become so popular they’re likely to disappoint their new owners for a while.

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