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A review of the past year’s performance of “Dream” and “Nightmare” equity groups from back in 2014.

As another Chinese stock market drama is unfolding, we may see a repeat of last summer’s action, where U.S.-listed stocks with pending “going private” deals saw their discounts widen significantly.

Groups within Info Tech and Health Care have been long time favorites; the Financials sector also looking more appealing of late. We are still anti-Commodity (for the third straight year).

The third month of Q3 2015 earnings reports registered an Up/Down Ratio of 1.12. With only 52% of firms reporting higher earnings, the lack of earnings growth isn’t confined to just the Energy and Materials sectors.

The U.S. 10-year yield was quite volatile, fluctuating in a 100 bps range between 160 and 260, and ending up a mere 10 bps higher for the year. But it was still better than most other major asset classes which saw all risk and no reward.

The 2016 pattern looks good on paper, but if the excitement in the first week of the year is any indication, we highly doubt 2016 will turn out to be another typical election year.

Our Ratio of Ratios crashed through its historical median of 4% in December and barely clings to its premium. This ends a period of almost seven years above the median.

In each of our three market cap breakdowns, Growth prevailed over Value, but Large Cap Growth was the only segment with a positive return, at a strong +9%. Growth stocks have experienced impressive outperformance since the middle of 2014.

It’s a scary thought but what does 2015 have in common with the infamous years of 2001, 2008, and 2009? An earnings recession for the S&P 500 — and the 2015 vintage certainly has some unique traits.

Our Equal Weighted Average for the index continued its streak of underperformance—losing to the Cap Weighted measure in nine of the last 10 months of 2015. The largest 25 firms were certainly the bright spot for the year—up 7.5% on average.

The S&P 500 lost 1.8% (price only) in December. Based on the 1957-to-date valuation metrics presented, downside to its historical average decreased by about 2% from last month’s –19% reading.

Despite the mechanical “Lower Risk” signal, we are clearly in a risk-off environment. We recommend a defensive stance towards credits at this point.

We are downgrading U.S. Investment Grade bonds to Neutral in light of the risk-off environment.

The Major Trend Index rose 0.03 in the latest week’s data to 0.92. The Momentum/Breadth/Divergence category, with a moderate gain, is primarily responsible for the improvement. Our shortest-term indicators are solid enough that we wouldn’t rule out a narrow move to new cycle highs in the DJIA and S&P 500 during the first week or two of 2016, but our longer-term work still points toward considerable cyclical risks for equities. The Core and Global Funds both remain positioned defensively with net equity exposure of 39%.

The Major Trend Index inched up 0.01 in the latest week’s data to a ratio of 0.89, with several sizable swings within its five indicator groupings largely cancelling one another out. This work remains consistent with a high-risk environment for equities, and both our Core and Global Funds are positioned defensively with net equity exposure of 38%.

The Major Trend Index reverted to negative territory based on data through last week, dropping 0.10 points to close at a ratio of 0.88. We assume that a cyclical bear market remains underway, and have reduced net equity exposure to 38% (from 42%) in both the Leuthold Core and Global Funds via a 4% short position in the SPDR S&P 500 ETF Trust (SPY). We’d view any further advance in U.S. blue chip stocks as an opportunity to increase hedges even further, provided the rally maintains its internally weak character.

The second month of Q3 2015 earnings reports registered an Up/Down Ratio of 1.11. On its own, the month of November was particularly weak with a stand-alone Up/Down Ratio of 0.97.

The S&P 500 gained 0.1% (price only) in November. Based on the 1957-to-date valuation metrics presented, downside to its historical average increased by about 1% from last month’s –18% reading.

Our Ratio of Ratios Small Cap premium bounced off its historical median as Large Caps underperformed in November.

Our AdvantHedge gross composite lost 1.6% in November, lagging the inverse performance of the S&P 500 (+0.3%) and NASDAQ (+1.3%), but outpaced the inverse of the Russell 2000 (+3.3%).