Latest Research

More spread compression is likely ahead.

There is still a lot more room for Munis to underperform Corporate bonds.

We will be looking for a good follow-through to consider an upgrade of these bonds.

This bullish action forced us to reverse a small mid-month addition to our equity hedge, and net equity exposure in the Leuthold Core and Global Funds is now 46%.

The S&P 500 gained 6.6% (price only) in March.

The Major Trend Index rose 0.04 to a ratio of 1.01 based on data through last week, reflecting moderate gains in the Economic and Technical work. Net equity exposure in the Leuthold Core and Global Funds remains at 40% after last week’s small equity hedge increase of 6%.

Based on data through the week ended March 18th, the Major Trend Index was unchanged with a 0.97 ratio (low-neutral zone). A big gain in the Momentum/Breadth/Divergence grouping was entirely offset by relatively sizable losses in the other four categories. These category movements prompted us to cut Leuthold Core and Global Funds’ net equity exposure to 40% (down from 46%). Short-term, an MTI return to negative territory could trigger additional increases to the equity hedge.

Based on data through the week ended March 11th, the Major Trend Index improved 0.07 points to a marginally “Neutral” reading of 0.97 (readings of 0.95—1.05 are Neutral zone). A near 200-point gain in the Momentum/Breadth/Divergence category was the sole driver, offsetting moderate losses in the remaining four categories.

Richard Russell—who wrote Dow Theory Letters for almost 60 years before his death last year—observed that “bear market rallies look better than the real thing.”

The short-term market surge certainly possesses the hallmarks of many previous bear-killers (or correction-killers)…but it also sports the look of many historical bear market rallies.

Assuming—only for the sake of argument—the bull remains intact, its seventh anniversary will mark a rare case in which the market was lower than at its anniversary a year earlier.

While the past several months’ reversion in valuation measures has certainly wrung some of the risk out of the market, if the bear market reasserts itself and drives stocks to valuations seen at average cycle lows, downside risks are still substantial.

High Beta has certainly lived up to its billing, during both the multi-month decline and the three-week rally off the February 11th correction low.

Relative valuations of Staples and Utilities sectors already reflect a “flight to quality” effect. Investors looking to add some economic/stock market defense should focus on the cheaper Health Care groups.

Based on comparative valuations alone, one could have made a case for investing in foreign stocks over domestic ones as early as 2010—when EAFE’s valuations sunk to an historical low, relative to the S&P 500. Today, that gap remains extreme.

Industrial commodity prices and the latest ISM figures both point to a stabilization in the manufacturing sector following a two-year deceleration. Expectations for this year’s earnings have turned more optimistic as a result, but are the hopes warranted?

If February 11th marks a lasting low for stocks, the 2015-16 decline will go down as one of the costliest in history not to have reached bear market status.

The S&P 500 decline has yet to come close to a bear threshold, but it’s nonetheless been sufficient to drive the Very Long Term (VLT) Momentum algorithm into oversold territory for the first time since late 2009. In 16 of 21 prior cases, VLT Momentum’s initial oversold reading was a harbinger of a market that was soon to become even more oversold.

YTD the S&P 500 has fallen 2% while the S&P 500 Banking industry group is down over 12%—a shortfall that has the attention of value investors and contrarians seeking a chance to buy high-quality banking franchises at fire-sale prices.

The Major Trend Index rose 0.10 points over the last five weeks. Despite its improvement, the underlying message is that a cyclical bear market remains underway.