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The Major Trend Index rose a solid 0.08 to 1.20 in the week ending September 13, with three of the five indicator categories recording gains. Stock markets that are “in gear” are generally not at risk of making an imminent cyclical peak.

The S&P 500 lost 3.1% (price only) in August. Based on the valuation metrics presented in the table below, the S&P 500 is 8% above its historical average. The S&P Industrials (excludes Utilities and Financials) now has 20% downside to reach mean valuation.

The Major Trend Index changed little in the face of August’s market weakness, closing the first week of September at a mildly bullish 1.12. During the month there were no changes to the targeted net equity exposure of 60% in the Core and Global Funds.

Financials (the largest Mid and Small Cap sector) decreased across all three market segments, while Information Technology (the largest Large Cap sector) was boosted for both Large and Small Caps.

The Equal Weighted S&P 500 (-3.0%) slightly outperformed the Cap Weighted S&P 500 (-3.1%). The Equal Weighted index continues outperforming YTD (+17.7% vs. +14.5%).

Growth’s leadership over Value has only been apparent in Large Caps, but this segment had a big short-term reversal in recent months. Large Cap Cyclicals (+7%) significantly lag Large Cap Growth (+17%) YTD.

Large Caps lost 2.9% (total return) in August, just ahead of Small Caps (-3.2%) and Mid Caps (-3.8%). YTD, Small Caps continue to perform ahead of the other two subsets.

Small Caps are selling at a 15% valuation premium relative to Large Caps, using non-normalized trailing operating earnings. This is the same as the past two months’ readings. Using estimated 2013 operating earnings, Small Caps are selling at a higher valuation premium of 23% (24% last month).

EPS growth for Large and Mid Cap companies continues exceeding their top-line growth, but Small and Micro Cap companies saw their EPS growth rates coming in below their top-line growth rates.

Large Cap result this month is the same as last month, but remains stronger than Q1. Smaller firms reversed course, as Mid, Small, and Micro Caps all rebounded with large sales momentum increases.

With two months of Q2 earnings reports in, results have continued trending downward with a reading of 1.27.

We take a detailed look at the decline in trading volume and conclude the trend might be a positive going forward.

Our AdvantHedge composite gained 0.8% in August, lagging the inverse performance of the S&P 500 (-2.9%) and the Russell 2000 (-3.2%) while matching that of the NASDAQ (-0.8%).

With a wide range of market cap choices, an excellent technical profile, and less dependence on federal spending than you might think, this group has compelling stories of future profitability and growth.

Auto Parts & Equipment, Systems Software, Life & Health Insurance and Life Sciences Tools & Services are featured this month.

Both models (particularly domestic) have a number of Attractive rated Information Technology groups and no Unattractive rated Tech groups. Financials’ domination of the Global Attractive range continues.

Aerospace & Defense was added to the portfolio this month.

Their relative cheapness, combined with the prospect of higher tax rates, certainly makes Munis more attractive now. But we’ll wait for interest rate volatility and outflows to subside before turning bullish on Munis.

On the positive side, the fundamental picture is still healthy for most U.S. high yield issuers, and defaults are expected to be low. On the negative side, weakening inflation expectations is a divergence that bears close monitoring. We will exercise patience and wait for a better entry point.

This is consistent with our overall cautious view on credits. Credit spreads continued narrowing despite higher volatility in the bond markets.