Major Trend Index

The Attitudinal category neared a new negative extreme for the rally off February lows, while the Intrinsic Value category reached a new extreme for the entire bull market. This combination of overvaluation and overconfidence will eventually be resolved with large market losses…

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Daily and weekly versions of all the advance/decline lines we track stood at cycle highs at week’s end, which—alongside the high in the Value Line Arithmetic Average—makes it hard to argue the market has narrowed significantly.

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Improvement in the Momentum work has been insufficient to offset weakness elsewhere, leaving the weight of the evidence still bearish. However, persistent strength in this category has been enough to discourage us from establishing additional equity hedges in our tactical funds.

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The Attitudinal-category reading has moved to a six-month extreme as the S&P 500 flirts with its January high; improvement in the Economic work continues to reflect the pullback in various commodity measures.

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The 30-point gain in the economic category was driven by a continued pullback in inflation measures. It’s possible that some of this reflects the chilling effects of escalating trade tensions. If that’s true, it’s the only positive side effect we can think of, and it won’t last long.

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A large gain in the Momentum category was almost entirely the result of a positive flip in a key market Reversal Model which had been bearish since March. While the long-term record of this model is good, its BUY signals over a forward three-to-six-month horizon have been less reliably bullish than, say, a breadth or momentum “thrust.”

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Sentiment toward stocks continues to heat up. Our S&P 500 Liquidity Premium shows that speculation in individual stocks is picking up relative to ETF trading, a negative sign. In addition, activity in stock index options shows the “smart money” rebuilding a bearish position.

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EPS gains, driven by the corporate tax cut, have led to improvement in several of our valuation measures, but the scope of these gains is small relative to the U.S. market’s degree of overvaluation.

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Our 52-week diffusion index on a 70-commodity basket now registers essentially neutral, while all of the non-energy commodity price sub-models have improved.

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We’d concede that neither the relative strength of Small Caps nor the divergently strong action of the NYSE Daily Advance/Decline Line fit the pattern of a stock market undergoing a late-cycle period of distribution, however, the relatively low percentage of NYSE issues now trading above their 30-week moving averages (45.5%) suggests the market may not be as internally healthy as popularly portrayed.

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After several weeks of muted movements, three MTI categories saw swings of more than 60 points. The Supply/Demand category’s loss was the biggest move, and mostly reflected commercial hedgers’ sudden unwinding of a big net-long position in stock index futures. Such action causes this important “smart money” indicator to be more in line with the DJIA’s Smart Money Flow Index, which continues to act badly.

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Performance discontinuities across some of the major indexes are striking. For example, while the NASDAQ Composite is up 12% YTD, the NYSE Composite is down 1%, despite those strong A/D readings for the latter index. Today’s action leaves a similar gap between the Russell 2000 (up 10% YTD) and the DJIA (unchanged).

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The decline in the attitudinal work was fairly broad based, with a few indicators even moving back to maximum negative readings.

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A sharp loss in the Attitudinal category reflects declines in all major groupings of sentiment measures, ranging from investor opinion surveys, to fund flows, to option trading activity.

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Supply/Demand work experienced the week’s largest category loss and reflects declines in the Smart Money Flow Index (which tracks opening and closing action in the DJIA) and in our Institutional Accumulation measure, which compares up and down volume to prevailing price action.

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The daily advance/decline numbers suggest the recent bounce has been broad, but analyses based on the 52-week highs and lows (including various versions of the “High/Low Logic Index”) are flashing warning signals similar to the ones seen in the fall of 2007 and summer of 2015.

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Last week’s rally succeeded in driving up one of our shortest-term measures of investor optimism, while corporate tax cuts have helped generate the highest readings in the 33-year history of our earnings “breadth” work.

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