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We are pleased with our results for 2014, as we averaged about 58% net equity exposure throughout the year and were within throwing distance of the all-equity benchmarks. Our performance run was substantially smoother, though, and earned good risk adjusted returns. We made no substantial changes to our allocation in December.

Info Tech and Consumer Discretionary are largest sector weights in domestic portfolio.

The best performing Attractive industries in 2014 came from five different sectors. Looking to 2015, groups from the Information Technology, Health Care, Consumer Discretionary, and Consumer Staples sectors look appealing.

Both portfolios outperformed their respective benchmarks for the month and YTD.

Major Trend Index Neutral: Equity Exposure Remains 52-53%

We are again impressed by the pattern’s predictive ability as most equity markets tracked their respective patterns quite well in 2014. Another banner year seems to be in store for the S&P 500. The exceptionally favorable pre-election year is the main reason, but we cannot be too complacent.

Growth Strong In Second Half Of 2014

Despite strong performance for stocks, the RAI ended the year at its highest level. While we are in a very favorable seasonal window, we recommend taking a more defensive stance for now.

U.S. Investment Grade Corporates: Reduced To Neutral, U.S. Municipal Bonds: Favorable, U.S. High Yield Corporate Bonds: Neutral

S&P 500: Smallest Firms Drag In 2014

Weight of the evidence suggests the bull market is in a broad topping process, likely begun in late-July. The duration, however, may be proportionate to the tremendous five-plus year upswing that preceded it.

Last year will certainly go down as the bull market year in which investors were finally retrained (as they usually are, late in every bull market) to buy the dips. Most of our Attitudinal measures—ranging from option activity and bear fund assets, to surveys of investor sentiment—show retail investors finally shaking off the worry that gripped them for most of the bull market’s first five years.

We’ve written periodically about the Presidential Election Cycle in relation to stock prices, sheepishly acknowledging both the persistence of the pre-election year effect and its pervasiveness across many markets

Think the bull market is long in the tooth at almost six years of age? Maybe not.

Small Caps lagged the S&P 500 by almost ten percentage points in 2014, but their underperformance streak technically dates back to April 2011. Nonetheless, their cumulative, 45-month underperformance in relation to the S&P 500 (now about –18%) is still modest enough that any mention of the current “Large Cap Leadership Cycle” is bound to draw a few head scratches.

Last year was a solid one for the Group Selection (GS) Score approach, with the Attractive list delivering a total return of +13.1%—more than 500 basis points above The Leuthold Group Universe average, which gained only +7.9%.

The recent Energy sector decline has accomplished the feat of wiping out all of the upside gains achieved during its “Third Act” played out in the 2006-2008 surge.

For more than a quarter century, The Leuthold Group has tracked hypothetical industry group portfolios composed of the previous year’s “Dreams” (best performers) and “Nightmares” (worst performers). The former is a gauge of a simple, trend-following investment strategy, while the latter is a crude form of industry group “bottom-fishing.” Sticking with tradition, the following pages detail how the 2013 Dream and Nightmare portfolios faired in 2014, and we reveal which industries qualify in the Dream and Nightmare portfolios of 2014.

In early October 2014, we noted the momentum reversal of Low Quality stocks and a few signs of the likelihood of transitioning to another phase of the quality cycle. The official numbers of Q4 have confirmed this.

We are nothing if not contrarians, but have also highlighted the hazards of “knee-jerk” contrarianism—in which investors are instinctively drawn to the asset, sector, or stock that is down the most in price in the recent past.