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Read this week's Major Trend. 

The strong market rebound in the second quarter lifted the relative return of Growth vs. Value to an all-time high by the end of June. Chart 1 reveals that the cumulative S&P 500 Growth / Value return spread hit a new record last month, surpassing the previous high reached at the end of the Tech bubble in June 2000. 

Market perma-bulls deserve high marks for their persistence, yet, despite all that’s transpired in 2020, their case is exactly the same as six months ago: Extreme stimulus won’t “allow” a significant stock market drop, nor any further economic deterioration.

We’ve written periodically about the likely distortion of market breadth figures resulting from High Frequency Trading, the domination of ETFs, and (we believe, most importantly) the decimalization of stock quotations. Our concerns led us to expand our technical arsenal, and one of the gems we uncovered in that process was the High/Low Logic Index (HLLI).

Many analysts thought the last cycle would end with a bit of “fire” in the form of higher commodity and consumer prices, and they might well argue they would have been right if not for the eruption of COVID-19.

The 41% S&P 500 rally would be half as large if measured in terms of gold, and a “unit” of the S&P 500 now buys 70% fewer ounces of gold than it did in early 2000. Meanwhile, when denominated in either silver or Bitcoin, the stock market rally has been almost nonexistent.

There’s one trend that’s lasted almost as long as the bull market and economic expansion and it hasn’t definitively come to an end. The current Large Cap Leadership Cycle hit the nine-year mark in April.

There are two concerns with the latest bullish thrust signal, with one, in part, causing the other. First, the S&P 500 return preceding the MBI thrust signal was +42.8%, almost triple the average slippage of +15% associated with all prior signals.

We encourage diversity of thought in our shop, but even pessimists among our ranks have a hard time making the case for a ten-year negative return for U.S. stocks, which was recently predicted by the founder of a large hedge fund.

The bullish consensus seems to be that unlimited Fed liquidity will lift all stock market and economic boats. However, past liquidity floods have tended to lift boats that were already the most buoyant. The “Y2K Liquidity Facility” and last fall’s emergency Fed intervention in the overnight repo market are two cases in which liquidity seemed to flow to where it was needed the least.

For those who believe the economy “drives” trends in stock market leadership, consider the cases of 1999-2000 and 2019-2020.

AdvantHedge was down 6.3% in June, trailing the inverse S&P 500 (-2.0%), and the inverse Russell 2000 (-3.5%).

The Leuthold Core and Global Portfolios both turned in positive performance in June.

Read this week's Major Trend.

What can slowdown the outperformance of Growth stocks? It turns out, the answer to that persistently-unanswerable question is “Not much.” Not even a global pandemic-driven sell-off and swift rebound. From the market high in February through June 30th, Growth handily outperformed every other factor.

There was minimal movement among the sector rankings. The only two to shift positions were Industrials and Materials, with the former dropping to 8th from 7th place and the latter rising to 7th place from 8th. Health Care, Communication Services, and Information Technology are the top-three rated sectors (out of eleven total). The bottom-three rated sectors are Real Estate, Energy, and Utilities.

Following the market bottom, the rebound across retail industries has been robust, but a divide has emerged. Consumers’ needs and behaviors have dramatically shifted as former lifestyles were uprooted. This swift change in economics has resulted in clearly-defined sets of winners and losers among retail industries.

While the market seems to have priced in a quick recovery, recent economic data has materially exceeded market expectations and provided support to the rally. Within fixed income, we maintain a favorable view toward investment-grade corporate bonds and we still recommend staying within range of the Fed’s fire power.

There has been chatter about the Fed implementing the so-called Yield Curve Control (YCC). Although the latest FOMC minutes suggest that YCC is not on the agenda for now, we believe the chance of YCC is probably much higher than the market currently anticipates.

The monthly gains from Microsoft (+11%), Apple (+15%), and Amazon (+13%) provided the entire S&P 500 price gain (+1.8%) in June. In the first six months of this tumultuous year, those three Tech Titans have added a combined $1 trillion in market cap.