Latest Research

Equity funds with a foreign focus remained the most popular fund category in 2015 (through November) as measured by net cash inflows from investors.

The Major Trend Index dropped 0.13 points to a ratio of 0.79 using data through January 8th. Several trend-following sub-models confirmed what our other "anticipatory" tools have been telling us for many months: a cyclical bear market is underway. Bearish market action to open 2016 has driven our tactical funds’ net equity exposure down to the 34-35% range. We’ll consider covering a portion of the equity hedge if evidence of a short-term low appears.

Our AdvantHedge gross composite gained 3.5% in December, outpacing the inverse performance of the S&P 500 (-1.6%) and NASDAQ (-1.9%), but lagging the inverse of the Russell 2000 (-5.0%). 2015 was a great year for AdvantHedge, finishing with a gain of 5.5% compared to the S&P 500 gain of 1.4%.

The Portfolio lost 2.3% in December and finished 2015 up 0.4%. The S&P 500 lost 1.6% in December and closed the year up 1.4%. In 2015, our Attractive-rated group composite average was down 0.2%, ahead of the group universe composite average which ended the year down 5.5%. Small Caps and international securities (ADRs) are the main drivers behind the group universe underperformance.

MTI Fell To Negative; Equity Exposure At 38%

The Attractive-rated groups outperformed the Unattractive groups by 15.5% in 2015. This is the third positive year in a row, and the best performance differential since 2008.

Leuthold Core and Global Funds’ net equity exposure trimmed back to 38%. It is now our opinion that the early January sell-off constitutes part of a second downleg in a cyclical bear market that began in May 2015.

Financials rose in December to rank #1 among sectors for the first time since the start of the financial crisis. In-line with our quantitative disciplines, we added a new Financials group to the Select Industries Portfolio: Regional Banks.

The most compelling evidence that a bear market is underway may not be what’s been punished (Transports, Small Caps), but what hasn’t. We believe the final bull market highs of any composite or sector index were recorded on December 29th.

Among the dozens of indexes we monitor, the year’s final all-time highs (S&P 500 Consumer Staples and S&P 500 Low Volatility Index on December 29th) can’t possibly provide any comfort to stock market bulls.

We’ve long argued that this tightening cycle began in January 2014, the month of the first of seven tapering moves which occurred through October of that year. There’s both economic and market evidence to back up this claim.

The Dow Jones Transports was the first U.S. index to top in this cycle (December 31, 2014), and it closed January 7, 2016 down 24.1% from that historic high. That development, in and of itself, sharply increases the odds that a new cyclical bear market is underway.

Valuations are high. Market internals are weak. And the MTI is negative. But for those seeking some truly authoritative evidence that there’s stock market danger ahead, consider the accompanying cycle chart unearthed from a gossip column in a 1958 issue of the Minneapolis Star.

When the Fed surreptitiously began to tighten as we believe (via tapering), in January 2014, history suggested that Consumer Discretionary and Small Caps would be the most likely initial market victims (at least from a relative perspective).

Foreign stocks’ perpetual underperformance has opened up a valuation gap that should look extremely appealing to anyone with a horizon of more than two years. But proceed with caution.

Hedge funds have shuttered by the dozen in the past few weeks, with the worst carnage among those focused on Emerging Markets and commodities. But the problem is broader.

Models can prove helpful in overriding an investor’s natural (and frequently costly) impulses. But we’ve come to believe that our long experience in model building and implementation has succeeded not only in overriding these impulses but in actually modifying them.

Liquidity “consuming” strategies like price momentum are generally considered to be more volatile than liquidity “providing” approaches like value investing.

Our original research on price momentum dates back to the late 1960s, and was based not on asset classes but on equity sectors and industry groups. We stumbled upon the Bridesmaid effect, in fact, while testing a handful of simple strategies about a decade ago.

We recognize that—regardless of their empirical appeal—momentum-oriented approaches aren’t suitable for every investor. For those investors, we’ve identified an alternative sector allocation strategy that’s delivered long-term results almost identical to those of the Bridesmaid approach, but which is based on a single, simple selection criterion that should appeal to the most hard-wired contrarian: The Low P/E.