Latest Research

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.

2013 and 2014 mark the first two years since 2007 in which equity fund nominal annual cash inflow tallies have outweighed those of bond funds.

The Major Trend Index rose 0.01 to a still-neutral 1.00 in its final weekly reading for 2014. Three of the five MTI categories declined on the week, with the Intrinsic Value work moving to a new negative extreme for this bull market. But these modest losses were more than offset by a gain of +46 points in the Momentum/Breadth/Divergence category.

Contrasting last week’s trends, most broad fund categories recorded net cash inflows this week. Domestic equity ETFs brought in the largest weekly net cash inflow of the year for the category.

The Major Trend Index rose 0.02 to 0.99 in the latest week, remaining within the neutral range where it’s been contained since late October. The background of inflated U.S. valuations, complacent sentiment and deteriorating internal market action continues to worry us, but the MTI’s trend-following elements have remained healthy enough to prevent us from moving to a more defensive posture. Net equity exposure in both the Core and Global Funds remains unchanged at 50%.

Negative cash flows were the trend across major fund subsets in the latest week; bond ETFs were the only category to buck the trend.

The Major Trend Index dropped 0.02 to 0.97 in the latest week, led by a steep drop in the Momentum/Breadth/Divergence category.

The Major Trend Index dropped 0.03 to 0.99 in the latest week, remaining within the neutral zone in which it’s resided since the end of October.

Domestic equity ETF net cash inflows continued this week at a decelerated pace; the large cap subset, however, saw net cash outflows.

The collapse in oil prices has brought down inflation expectations dramatically. Inflation will likely be the single most important driver of interest rates in the next 6-12 months.

Perhaps the most important is the credit channel; the substantial curve flattening that happened recently in anticipation of the Fed hike next year has made lending standards tighter for small businesses.

Amidst the Energy sector tumult, the Oil & Gas Refining & Marketing group is the exception.