Major Trend Index

The Attitudinal category’s net reading is the best (i.e., most pessimistic) since the week following the February 2016 correction low. While that’s an encouraging sign, there’s no mechanical threshold on this composite which would indicate a “safe” re-entry point.

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The lack of more meaningful MTI improvement in response to this month’s collapse suggests the bear has yet to fully express himself. But the swipes he’s taken so far have hit hard: Last week saw a nearly 150-point gain in the Intrinsic Value composite to its best level since April 2016.

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The median trailing P/E across the Leuthold 3000 universe has corrected more than 30% from January’s bull market peak (and all-time peak) of 25.1x to just 17.3x on Friday, while the median Normalized P/E ratio has shrunk more than 20% to 22.4x.

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More of our long-term trend-following measures deteriorated to "bear" status, but it isn't unusual for the market to stage a brief countertrend rally when this work becomes as decisively bearish as it is now.

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The Economic/Interest Rates/Inflation category was not a big mover on the week, but its relative stability of late has masked a major shift within key indicator groupings. Leading inflation measures have faded sharply, with upgrades across the board in the commodity readings.

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While the improvement in the fundamental categories is encouraging, the weight of the evidence continues to support a cyclically defensive stance toward the stock market.

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A critical difference we’ve discussed repeatedly is that market overvaluation in the 1999/2000 episode was concentrated in roughly the top-50 Mega Caps, while current overvaluation—though arguably not as extreme—afflicts nearly the entire list of publicly-traded U.S. stocks.

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Although the Intrinsic Value category is now about 100 points above the worst levels recorded in early January, it is far too early to begin making a bullish valuation case for the stock market. Interestingly, some of the same pundits who warned “valuation is not a timing tool” on the way up are the ones trotting out these premature, value-based arguments—which are typically built on extremely-optimistic forecasts for 2019 operating EPS.

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Momentum category collapsed to receive its first negative reading since early March 2016, while the Attitudinal category flipped to net positive ground for the first time in more than 2-1/2 years.

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We believe the catalyst for market weakness has been the decline in accommodation by the Fed and other central banks. While there has been a pullback in some of the leading inflation measures since June, the rate of global tightening has actually accelerated.

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The abrupt decline in the Momentum work reflects deterioration in most trend models, along with bearish flips in the Chart Scores for the Russell 2000, NYSE Financials, KBW Bank Index, and Securities Broker/Dealer Index (XBD). The NYSE Daily Advance/Decline Line provided only limited warning of the impending weakness.

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The weakening we’ve observed for several weeks in most internal stock market measures began to spread last week to the “externals,” i.e., the major market indexes like the DJIA and S&P 500. Still, we are amazed these indexes remain so close to their cycle highs in light of the extent of subsurface damage reflected in the daily and weekly breadth figures.

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Since late August even the strongest of the market breadth measures—the NYSE Daily/Advance Decline Line—has failed to confirm highs in the DJIA and S&P 500, while the weakest—which measures 52-week highs and lows—has continued to erode.

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Swings within the five factor groups were muted, but the small loss in the Intrinsic Value work was enough to drop that category to a new negative extreme for the current bull market. The new low in this category counters the argument that U.S. stocks would “grow into” their valuations in 2018 thanks to the corporate tax cut and acceleration in GDP growth.

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High/Low Logic Index readings suggest a “fractured” stock market. Usually, though, a fractured stock market is also a narrow one, but the evidence on that score is mixed.

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Even the long-term trend model on the MSCI ACWI, which has been considerably weaker than the S&P 500 for several months, reverted to bull territory last week.

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