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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%

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.