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A big question for investors is: have oil prices bottomed? For the past four days, WTI jumped 19% from its low reached on January 28th, giving some the conviction that prices are reverting back to prior high levels.

The market is at a critical juncture with oil-related assets very oversold while equities are holding near all-time highs. We continue to recommend taking a more defensive stance for now.

Up/Down Earnings: Solid Start With Q4 Reports

Small Cap Premium Sinks To 13%

The S&P 500 lost 3.1% (price only) in January. Based on the 1957-to-date valuation metrics presented below, downside to its historical average decreased by about 1% from last month’s reading of –15%.

Momentum Continues For Growth Stocks

S&P 500: Worst Month Since Last January

Most broad fund categories experienced positive net cash flows this week, with the exception of money market funds and domestic equity ETFs.

The Major Trend Index fell 0.01 to 1.00 in the latest week, with moderate swings in the Economic/Interest Rates/Inflation and Supply/Demand categories mostly offsetting one another. However, the bigger picture has changed little during the MTI’s 13-week stay in its neutral zone: Valuations and sentiment remain very inflated at a time when internal stock market action has become more disjointed. However, the technical work has not deteriorated enough to drag the MTI into bear territory, and the deflationary impact of the last six months’ commodity collapse has (so far) had a net positive impact on this work.

Domestic equity funds have seen net cash outflows so far in 2015, while bond funds have collected more net cash than any other category.

The Major Trend Index rose 0.04 to 1.01 in the latest week, the 12th consecutive neutral reading dating back to October 31, 2014. The MTI’s message remains that stock market risks are elevated, and we continue to target reduced net equity exposure of 50% in the Core and Global Funds.

The Major Trend Index fell 0.02 to 0.97 in the latest week, driven by small losses in both the sentiment and economic work. Technical market action, while hardly impressive, remained just bullish enough to keep MTI from falling into negative territory (i.e., readings below 0.95). We continue to target below-average net equity exposure of 50% in the Core and Global Funds, and are prepared to make further significant reductions if the MTI finally rolls over into “bear” territory.

Bond funds and hybrid mutual funds captured estimated net cash inflows this week, while domestic equity mutual funds saw flat net cash flows.

For the first week of 2015, estimated net cash fund flow trends were mixed but mostly negative for major fund subsets.  Bond and hybrid mutual funds were the exceptions.

The S&P 500 lost 0.4% (price only) in December. Based on the 1957-to-date valuation metrics presented below, downside to its historical average decreased by about 1% from last month’s reading of –16%.

Our domestic Group Selection (GS) Scores worked well in 2014. Even more encouraging, all of the outperformance was due to the Attractive groups outperforming the average group. Among the factor categories driving the GS Scores, Profitability factors worked best; unusual in a strong bull market.

Up/Down Earnings: Above Average Final Number For Q3.

We expect much higher volatility in interest rates this year as the market grapples with the prospect and timing of the Fed’s first rate hike.  Our base case is for the Fed to raise rates in the third quarter. There are various reasons for the Fed to be patient. Inflation will be the biggest one.  The threat of oil-related risk contagion is certainly real. We are concerned that equities have not fully priced in this threat.  

Retail-related industry groups continue to strengthen in our GS Scores, and Hypermarkets & Super Centers is one of the top rated groups in our rankings. This also gives exposure to Consumer Staples, currently the highest rated among our composite sector scores.

Small Cap Premium A Tick Higher To 16%