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The Major Trend Index was unchanged at 1.10 in the week ended July 18th, hovering just 0.05 above its 0.95-1.05 neutral zone. The combination of inflated investor sentiment and weakening market internals is a negative one for the very near-term, and we cut net equity exposure in tactical funds to 60% (from 65-66%) to position for potential late-summer trouble.

This week, the domestic equity ETF subset saw net cash outflows for the first time in nine weeks, while bond ETFs experienced net cash inflows for the first time in seven weeks.

Domestic equity ETFs have seen ongoing positive net cash flows, while bond ETFs experienced a sixth consecutive week of net negative flows. ETF category flow trends continue to run counter to mutual fund flow trends.

The Major Trend Index rose 0.01 to 1.10 in the week ended July 11th, with large, opposing moves in the sentiment and market action work mostly cancelling one another out. Net equity exposure in the Core and Global Funds was trimmed by 5-6% last week to a current target of 60%.

              The Major Trend Index dropped 0.04 to 1.09 in the week ended July 3rd, matching its lowest reading since last August but remaining in positive territory. Declines in both our sentiment and market action categories drove the decline, and we responded this week by trimming net equity exposure in the Core and Global Funds to 60% (from prior levels of 66% in the Core Fund and 65% in the Global Fund).

Fund flow trends continue among broad fund genres.  While YTD domestic equity mutual fund net flows are now negative, other equity funds, such as foreign-focused, are picking up the slack.

In Q2, the Low P/E Tier was the best performing subset, up 6.6%. The Low P/E Tier also leads YTD +9.6%. The High P/E growth names are lagging severely YTD, up only 1%.

The S&P 500 gained 1.9% (price only) in June. Based on the 1957-to-date valuation metrics presented below, downside to its historical average is -14%, about 1% more than last month’s reading. The S&P Industrials’ downside to mean valuation (excludes Utilities and Financials) also increased slightly to -27%.

As we expected, at 250-270, the 10-year yield stayed within our narrow target range in June.

With the two factors decoupling, we examine if either one has been adding more value.

Newfound fund flow trends established midway through 2013 are still unbroken halfway into 2014. Even with net cash inflows resuming to bond mutual funds, the definitive shift in preference for equity funds, although more subtle, is still intact.

Our beginning-of-the-year message—“lower your expectations and be patient” has largely been true so far this year as most equity markets tracked the historical pattern pretty closely.

Strength in the Energy sector has been so compelling that our two recent Energy group allocations together now make up a 10% portfolio weight, after having no Energy exposure from June 2013—April.

We sense that the lack of volatility in the stock market in recent months is beginning to unnerve even the bulls, who seem increasingly compelled to do something in response to the relentless new highs.

As a follow up to a 2012 Special Study, we examine the growth in Electronic Payment Systems. Global competition in the industry has significantly heated up, as more countries are setting up their own national payment systems, relying much less on the “big four” global giants.

Although Valuations are a headwind for the asset class, at the stock level our disciplined multi-factor model indicates best opportunities are Small/Mid Caps, and Hotel & Resort-oriented names.

Low Quality Momentum persists, and a look at how Valuation factors affect the Quality model output.

Small Caps have staged a nice rebound in the last several weeks. On July 3rd, the Russell 2000 rose to within a fraction of an index point of its March 4th all-time high. But on a relative strength basis, the bounce has been pretty muted.

We certainly have nothing against dividends, but for more than a year we’ve believed that high-yielding themes like the Utilities, REITs, and the S&P Dividend Aristocrats have become so popular they’re likely to disappoint their new owners for a while.

Managed Health Care, Property & Casualty Insurance, and Railroads highlights.