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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.

The S&P 500 lost 0.4% (price only) in February.

Select Industries gross composite gained 1.5% in February and is down 6.7% YTD. Global Industries lost 0.6% in February and is down 8.5% YTD.

MTI Negative; Net Equity Exposure Increased To 44%

Momentum reversed in February, primarily due to rallying Materials stocks. Value and Profitability both performed well.

Despite the improvement in market sentiment, U.S. bond yields were dragged lower by their international counterparts.

The market’s latest infatuation with bonds was driven by grave concerns that the weakness in energy and manufacturing sectors might be spreading to the U.S. economy as a whole.

We believe a short term rally is more likely and recommend a neutral stance towards credits at this point.

Given more attractive valuations, we tactically upgraded investment grade Corporates to Favorable.

The second month of Q4 2015 earnings reports registered an Up/Down Ratio of 1.12—up from the post- financial crisis low of 1.11 last quarter. With 51% of the observations in February, the “Up” count edged out the “Down,” but barely.

The Ratio of Ratios bounced off last month’s multi-year low (4% Small Cap discount) but still sits firmly below its Small Cap median, which is a premium of 4%.