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Our Royal Blue Value segment surged in September and ended ten consecutive quarters of underperformance to Royal Blue Growth. Since the start of 2017: Royal Blue Growth +64.9%; Small Cap Value +5.9%.

Modest outperformance from the Small Caps helped pull our Ratio of Ratios out of its recent nosedive. Still, this vignette sits at 18-year lows, and there’s no guarantee that the relative valuation plunge in Small Caps won’t resume.

As we roll-in the final month of Q2 earnings, our Up/Down Ratio reads only 1.11. This quarter’s figure was looking back to the best period of the 2018 earnings bonanza (2.06 ratio in Q218).

The top-three-rated sectors are Communication Services, Consumer Discretionary, and Financials. As recently as March, Financials ranked in 9th place out of 11 sectors; it has now placed among the top four since May.

The groups we examine here are particularly interesting because they are a diversified mix across sectors with varying macro-factor relationships and risk profiles. They have scored well for a long period of time and have been long-term positions in our SI portfolio.

Read this week's Major Trend. 

The Momentum style—in which investors buy what has been going up recently—represents an optimistic, hopeful, “I’ll take some of that” mentality. The Low Volatility factor entails a pessimistic, fearful outlook in which investors want (or need) to stay invested in stocks but desire downside protection in case the market performs badly.

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Style rotation! Regime change! Market action of the first two weeks of September coaxed the few remaining Small Cap Value managers off ledges from New York to San Francisco.

Read this week's Major Trend. 

This week’s massive stock market leadership flip has certainly remedied some of the breadth weakness we discussed in this month’s Green Book. But we can’t help wonder whether the move is analogous to performing a transplant on a 95-year-old. The patient might survive the surgery, then die while under anesthetic.

Smart beta ETFs have become an immensely popular investment tool, attracting billions of dollars in AUM by providing investors with targeted exposure to factors such as Value, Momentum and Quality.  Characteristics such as these have been shown to generate alpha over time, and investors understandably wish to have focused positions in these return-generating styles. 

Read this week's Major Trend. 

Despite a historic economic expansion during the past decade, there is an ever-increasing number of companies that are finding profitability has become harder to achieve.

This Stock Market section’s unifying theme has been that of an historically two-tiered market, one in which Domestic, Large Cap, Growth, Consumer-oriented, and Low Volatility stocks have reigned supreme.

A general rule of thumb for thematic equity investors is that the dominant leadership sectors and groups in a given bull market normally don’t repeat as leaders in the subsequent bull.

The Russell 2000 is the most important major index on the cusp of a new BUY signal. Our best guess is that Small Caps will still trend lower for now, creating a buying opportunity in the months ahead.

While investors in Value, Small Caps, and especially foreign stocks might beg to disagree, a key MTI technical measure suggests this decade’s stock-market ride has been almost entirely “pain free.”

A recent theme in our valuation work is that we no longer need to assume a full-blown “reversion to the mean” to illustrate current U.S. stock market risks: Even a reversion to “old” bull market highs in ratios like S&P 500 Price/Sales, Price/Cash Flow, and Normalized P/E would result in bear-sized losses.

We always do our own work and draw our own conclusions. Lately, though, we’ve wondered what the late “Monetary Marty” Zweig might say about the stock market’s current liquidity backdrop.