Major Trend Index

We are not in the “melt-up” camp but we’re impressed by the close similarities in leadership with the greatest late-cycle melt-up of all time, which took place from late 1998 through March 2000.

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Although we are not in the “melt-up” camp, we’d concede that stock market leadership is exactly what we’d expect if we were in that camp: Domestic over Foreign, Large over Small, and Growth over Value. Price action continues to remind us of the powerful rebound off the fall 1998 lows. Current earnings and liquidity trends, however, are not nearly as supportive as they were during that historic market move.

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The Boom/Bust Indicator, a weekly ratio of industrial-commodity prices to initial unemployment claims, has had a near-vertical rebound to old highs in the last several weeks. This index usually peaks out many months in advance of a business cycle peak (although not in 2007, when it provided no warning of the pain to come).

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If the market’s manic rebound succeeds in assuaging consumers’ recently shaken confidence, we can certainly see a scenario in which the economy and corporate profits firm up after their current slowdown… although that is not our bet.

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The Intrinsic Value category remains a drag on the MTI but is well below cycle extremes seen in January 2018 and again in September. The Momentum category, however, continues to nudge the MTI higher for the third consecutive week.

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One of our long-term momentum models improved last week, while the Dow Bond Oscillator—as good of a mechanical monetary indicator as we’ve encountered—pushed further into positive territory.

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Within the Economic work, the big development was a bullish flip in our Dow Bond Oscillator (DBO), which crossed above the zero threshold by the thinnest of margins. Subjectively, however, we are troubled that government yields across the maturity spectrum have been holding near recent lows in the face of equities’ powerful rally.

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Valuations seem to ignore indications that an earnings recession has begun, let alone the possibility that S&P 500 GAAP Earnings Per Share for 2018 could represent not just a short-term peak, but perhaps a cyclical peak as well.

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All of the domestic and global quantitative Chart Scores in the Momentum category are now positive and both the Advance/Decline and High/Low figures leave no doubt as to the breadth behind the market’s 10-week rally.

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The MTI’s stubbornness during the current rally confirms our overall sense that cyclical risks facing U.S. equities remain high. That said, we have great respect for the action of the market itself—enough so that we’ve allowed net equity exposure in our tactical funds to drift upward.

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Momentum category gain was driven by strength in breadth measures, selected trend models, and most of the Chart Scores.

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The Attitudinal category, which tends to vary inversely with the Momentum work, turned negative for the first time since mid-October, suggesting growing investor conviction that the rally will continue.

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From a Momentum perspective, chart work has improved across the board but much of the longer-term trend work has remained in neutral or bear territory. These measures are, by definition, late at turning points, and we strongly prefer that the “anticipatory” tools within the MTI drive most of the swings.

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The Attitudinal category remains solidly bullish, suggesting there are significant investor doubts surrounding the rally. The market has also absorbed the past few days’ earnings torpedoes fairly well, another sign that expectations are still subdued.

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While growth rates in M1, M2, and MZM appear to have leveled off following their sharp declines over the prior 18 months, the annual rate of decline in the Adjusted Monetary Base (a good proxy for the Fed’s balance sheet) accelerated to almost 12% at year-end from just 3% six months earlier.

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The move off the late-December lows has been broad and powerful but not at all unusual for a countertrend move in a bear market. Since 1945, bear market rallies in the S&P 500 have lasted an average of six weeks and carried the index higher by an average of 10.8%.

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