Latest Research

Give those who’ve advised investors to “Sell In May” over the years some credit: they’ve never been too specific.

South Korea is facing a perfect storm of military threats, anemic economic growth both at home and abroad, a competitive threat from Japan’s depreciating currency, and a sell-off from a large ETF sponsor. Will its stock market decline further or is this an opportunity to do some bargain hunting?

While flows into the largest mutual fund category by assets have petered out in recent months, a number of impressive fund flow trends quietly remain intact.

April’s temporary drop in the Major Trend Index to Neutral status now appears to have simply been a false alarm. The MTI reverted to a bullish stance with the reading for the week ended May 10th, and closed the month at a moderately bullish 1.16.

Group Deactivations, New Groups and best performing groups in May.

Alternative assets have attractive return rates since 1994. But their portfolio diversification benefits have diminished as they become more equity like, though their correlations to bonds have fallen.

Growth stocks are still undervalued compared to their own history. Royal Blue Growth is less undervalued than the other Growth segments, and it is closing in on its historical average valuation. Value stocks are all overvalued (but less so in the Small Cap subset).

But Mid Caps are slightly outperforming YTD at +16.7%, though Small Caps (+16.5%) and Large Caps (+15.4%) are not far behind.

Large Cap Value outperformed Large Growth by over 400 bps in May.

Small Caps are selling at a 14% valuation premium relative to Large Caps, using non-normalized trailing operating earnings (8% last month). Using estimated 2013 operating earnings, Small Caps are selling at a higher valuation premium of 22% (16% last month).

These tables identify and compare important characteristics of the broad sectors of the S&P 500, along with the S&P Mid Cap and Small Cap indices.

The Equal Weighted index also outperforming YTD.

20 Year T-Bond: 5 3/8’s, Maturity: 2/15/2031, YTM 2.88% (vs. April 30th YTM at 2.39%)

High yield bonds are not immune to the tapering of QE.

Inflows into Muni bond funds turned negative; higher interest rates currently the biggest risk.

Consistent with our overall cautious view on credits, we still like “safe spreads”.

The RAI rose in May and stays on a “High Risk” signal. We remain cautious and recommend higher quality within fixed income.

April inflation numbers were generally lower than expected. We are shifting out our inflation outlook by six months. We believe inflation will be a non-factor for the next six months but will increase moderately in the following six months.

The global yield curve is in a sideways range bound pattern, indicating anemic demand for credit. An examination of developed and emerging countries confirms our “muddle through” view.

We think the 10-year yield will likely consolidate around 200-215 before taking a shot at 245. The 245 level looks like a strong barrier and will likely hold in the foreseeable future.