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Small Cap Growth stocks have gotten off to a rotten start in 2016—down almost 12%. On a relative basis, the segment has also been lagging Small Cap Value—underperforming by 9% since last July.

February turned out to be a month of trend reversals.

We use our Group Selection (GS) Scores to identify the potential for a catalyst, and to gauge the health and future performance potential of those groups out of favor by analysts.

We see solid prospects for potential industry growth; consolidation and a full-blown industry evolution have resulted in group constituents having more in common than ever before.

New developments have lifted sentiment toward oil and Energy names, but we caution bottom-fishers to be mindful of risks. The fundamentals in the oil patch do not yet support strong oil prices going forward.

Highlighting Automotive Retail, Education Services and Insurance Brokers.

The Major Trend Index ticked down 0.01 point to a ratio of 0.86 using data for the week ended February 26th. Losses in our sentiment and valuation work offset the technical improvement that had stemmed from recent market gains. The economic category stabilized following a multi-week slide, although there’s no sign the current earnings recession has begun to abate. 

For the second week in a row, the Major Trend Index gained 0.02 points to close at a ratio of 0.87 using data for the week ended February 19th. We believe a bear market rally remains underway and have positioned the Leuthold Core and Global Funds with net equity exposure of 42%, compared with levels near 32% in the third week of January.

The Major Trend Index rose 0.03 to a ratio of 0.83 using data for the week ended February 5th. The ratio was lifted by moderate gains in both the Attitudinal and Momentum/Breadth/Divergence categories. The work suggests a cyclical bear market remains in force—and it’s worth noting that virtually every global stock market measure other than the DJIA and S&P 500 tends to confirm that view. Broad market damage, in fact, has been severe enough that we’ve covered another portion of our equity hedge, lifting net equity exposure in the Leuthold Core and Global Funds to 40% from 36-37%.

The Attractive quintile of the GS Scores became more defensive in nature; the six groups that were downgraded all sported a cyclical business model. The SI portfolio’s Homebuilding group was deactivated after its GS Score strength deteriorated fairly quickly during its disappointingly short tenure.

We think the Fed’s projection of four more hikes this year is absolutely unachievable, and we are no doubt siding with the market’s current projection of one hike, at most (if any), this year.

Bear markets need a “hook”—some sort of misdirection that keeps the majority hoping. Our work suggests a primary bear market is underway, and we fear oil is this bear’s hook…but the problems run deeper than oil.

As quantitative investors, the disciplines of the numbers trump stories—even our own. But we’re struck that the stories depicted by our Major Trend Index and other market tools over the past two years are entirely logical and sequential. Unfortunately these stories rhyme with those of past market cycles.

What initially looked promising fell apart fairly quickly

At its January 20th closing low, the S&P 500’s peak-to-trough decline of –12.7% barely met our definition of a severe market correction (an S&P 500 loss of 12% to 18%). But the behavior of this particular index can be quite sinister during the final phase of a bull market—and during much of the ensuing bear.

At the August and late January S&P 500 lows, both the Daily and Weekly NYSE New Lows figures exceeded 40% of Issues Traded —a degree of downside thrust rarely seen outside of bear markets.

There’s an old trader’s adage which holds that “the most powerful sell signal is a failed buy signal.” Last fall we noted that European equities and Small Cap Value had triggered BUY signals on our Very Long Term (VLT) Momentum algorithm.

If the current global bear market manages to shake investors’ blind faith in central bankers, this decline might actually accomplish something in the long term. But breaking that faith will take awhile.

This month’s “Of Special Interest” allots eight pages to the (opposition) view that the correction is over, featuring charts we find the most threatening to our bearish stance. Based on its sudden popularity among the press and punditry, the indicator in this chart—highlighting the air-pocket in investor confidence—perhaps should have been part of that feature. Here’s why it wasn’t.