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

The 2008 worst performers shot to the head of the class in 2009. History however shows it doesn’t usually pay to buy the prior year’s laggards in hopes of hitting it big the next year.

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Based on loud bearish complaints about the “junk rally”—and our commentary on the Revenge-of-the-Nerds (anti-momentum) effect—it should come as no surprise that 2009 marked the most dramatic reversal of industry leadership we have seen in our twenty-plus years of tracking this work.

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In 2009, Main Street investors continued to pull money out of U.S. focus equity mutual funds. There were  some equity funds that they did embrace…specifically Emerging Country funds.

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A look at how the market reveals its preference for the top-line growth (revenue growth) vs. the bottom-line growth (EPS growth).

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While most are content to make annual predictions at this time, leave it to Doug Ramsey to bite off an even bigger piece…predicting the next DECADE.

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There are four key decisions a company’s management has to make: Dividend Policy, External Financing, Capital Expenditure (Capex), and Research & Development (R&D).  We studied how the market rewards each of these management decisions.

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Climbing the bull market stairs. Our initial upside price target for the S&P 500 is 1300 to 1350. This is based on normalized P/E ratios moving to prior bull market average peak levels, as well as on past market peaks.

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Market breadth has weakened considerably, which has historically been a big negative for stocks. However, the lead time between peaks in market breadth and eventual bull market peaks are long and variable.

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Current market is closely aligned with the 1973-1974 post bear market recovery. Expect to see series of higher lows before market ultimately makes new high.

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There is a potential valuation ceiling confronting U.S. stocks. 2002 S&P valuation lows may be the point that this cyclical bull market tops out.

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What will be one of the key performance drivers for  the second half of the bull market? The short answer is the same catalyst that brought the stock market down during the latter half of the last bear market: Liquidity.

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Return On Equity (ROE) has been performing well as a quality factor on a global basis over the last six to twelve months.

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And now our final new analyst introduction (for the time being) of Chun Wang.

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There’s an overwhelming consensus that the U.S. economy has slipped into a long-term phase of declining growth in real GDP and chronically higher unemployment. Here’s a dissenting opinion from a client, along with Steve Leuthold’s response.

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The “easy money”—at least psychologically— may still be ahead for some. Money continues to move out of U.S. equity mutual funds, and there is still skepticism about the stock market.

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Following a strong September, October may be a little weaker. However, readers should use any October scare to buy equities in anticipation of strong end to 2009.

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Secular versus Cyclical markets. It shouldn’t really matter. Investors can lose a lot waiting to be right. The Key is to focus on the cyclical movements within a secular bull or bear market.

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Most stocks, especially low quality stocks, have already bounced so there will be no Playing The Bounce strategy this year.

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As of the end of Q1, the 20 year total return ACR differential between the S&P 500 and Ten Year Treasuries was negative, and at its lowest reading in 60 years.

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As one of the oldest investment philosophies, value investing has certainly stood the test of time. The recent market meltdown is no exception.

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