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

It does not look like a very good “Playing The Bounce” year. Many fund managers still have substantial tax loss carry forwards they can use to offset this year’s gains.

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The latest bull market has now essentially matched the returns for all bull market recoveries dating back to 1900. Remarkably, it has accomplished this in only half the normal time frame.

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Low quality stocks led out of the past bear market, as typically occurs. Despite being the clear winners from the 2009 lows, it looks like the lower quality stocks can continue to outperform given current valuations and momentum.

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It’s a big mistake to react to the headline reports of employment, and an even bigger mistake to make investment decisions based on them.

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Offerings are beginning to pick up. While not even near the levels of excess, the trend bears watching. The initial surge in offerings is typically indicative of a rising market.

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Now that the election is over and QE2 in the works, resist the temptation to “sell the news.” We expect to see the market rally through the end of the year. Sentiment still benign and valuations still attractive.

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Not much happening with this year’s edition of “Playing The Bounce.” Initial list of qualifiers posted a loss of 1% in October, while the S&P 500 was up 3.7%.

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It has become more and more difficult to filter out the short term economic noise. By focusing on this minutia, investors can easily lose sight of the big picture.

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Housing stocks, and the enablers that helped create the bubble (Financials), are following the usual pattern of busted bubbles. After the bust, these past bubbles typically see a beta bounce establishing post crash highs. After that, it can take many years before these highs are again broken.

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Correlations between asset classes have been running quite high over the last couple of years. Eric Bjorgen looks at current tightly correlated sectors that historically have not been so correlated.

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Stock/bond Risk-reward relationship beginning to return to normal. Back in Q1 2009, performance differential between S&P 500 and 10 year T-bonds was at generational lows. In prior periods of bond superiority, stocks ultimately came soaring back. Expect to see stocks do much better over next 5 years.

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A look at Asian valuations show China to be fairly valued (neither overvalued nor undervalued), but there are other attractive (cheap) ways to play consumer stocks in Asia.

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Major Trend Index now Positive (both global and domestic). Even though we are bullish, there are several bullish arguments that we still don’t buy.

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August turned out to be a very volatile month, not the “doldrums” that many investors would have wanted to see during this traditional summer vacation month. Budding optimism that had developed in investors back in April has now apparently been completely washed out by the poor August performance.

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Doug Ramsey looks at his own 15 month election cycle work to examine historical performance for a variety of different asset classes.

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We turn our attention to the domestic equity markets to determine where market history has hidden its seasonal landmines. 

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Current market recovery continues to track the post 1974 bear market recovery quite closely.

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Per our work, sectors like Consumer Discretionary and Technology provide a better way to capitalize on the global recovery now underway.

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It’s easy to see why equity investors are so down when looking at updates of the long term stock market performance. It’s even more depressing when long term equity returns are compared to bond returns.

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