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We believe the negative impact of central bank liquidity reduction is here to stay for the foreseeable future. We recommend defense within fixed income.

As credit spreads widened, something rather unusual happened: investment grade Corporate bonds performed far worse than High Yield bonds.

Today’s market is barbelled regarding company size, with the mega-cap Tech stocks and the S&P 600 Small Cap index both outperforming the middle of the S&P 500.

Read this week's Major Trend.

In 2017, equity and bond funds captured a staggering net $400+ billion. In 2018, uneasy investors are still buying funds, but at subdued levels compared to the same period last year.

The S&P 500 squeaked out a monthly gain for June—earning a “turkey” of three positive months for the second quarter.

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.

The stock market liquidity squeeze we’ve discussed this year hasn’t played out quite like we expected. Traditionally, Fed tightening and slowing money growth hit Small Caps earlier, and harder, than the blue chip stocks...

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.

An important feature of this bull market—and a reason for its longevity—is the slow recovery in investor attitudes relative to valuation altitudes...

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).

Annual Producer Price Inflation rose to 4.0% in May, a key threshold above which the S&P 500 has historically delivered essentially flat returns. But the fact that this reading occurs against a backdrop of full employment is cause for even more concern. Context is key...

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

We found that ETFs with the largest one-month, two-month, and three-month fund inflows underperformed going forward. When further broken down by sub-asset class strategies, this pattern is pronounced among equity ETFs, while fixed income ETFs do not appear to be affected by fund flows.

Quantitative investment firms are increasingly touting the cross-disciplinary backgrounds of their research staffs, with prior high-level experience in areas such as medical research and engineering not uncommon.

The Supply/Demand category carries the smallest weighting among the five factor groupings in the Major Trend Index, and this weighting is further diminished by the fact that its components rarely line up in a way which loudly proclaims that an  “accumulation” or a “distribution” phase is underway. Today is just another of those typically inconclusive times.

The gap between the 10-year Treasury yield and the federal funds rate has narrowed sharply in the last year but remains a long way (~110 basis points) from inverting.

The stock market has narrowed, but not in the way we envisioned—nor in a way that’s consistent with most historical bull market tops. Small Caps and market breadth measures are traditionally the first to wilt when monetary tightening begins to hit the stock market. Instead, they are the leaders.

Old age has certainly put no limitations on the bull’s exploits, so we should be cautious in reading too much into its meandering recovery path. However, it’s possible that action since the February low is not a recovery process but rather a countertrend bounce within a larger downtrend.

Early this year we chatted with the retired founder of a Midwest investment management and research firm. After living and breathing markets for six decades, this bearded and iconoclastic character had avoided financial publications, Bloomberg, CNBC, and the like for more than a year.