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With renewed worries about the stock market, investors are pursuing safe-haven ideas—and Quality is a long-time favorite. Yet, despite its defensive appeal, the Quality factor has been a prominent bull-market leader, of late. Are the striking returns of Quality due to outsize exposure to the Mag 7—or have other high-quality stocks been equally fruitful in the latest upswing?  

The economy normally fades heading into a series of rate cuts, with higher unemployment and lessening CPI inflation. Risky assets (stocks and credit) do well, and bond yields move lower. Real assets also benefit (gold in particular). On the whole, an easing cycle is favorable for most assets.

Reada this week's Major Trend.

The S&P 500’s August gain was its ninth advance in the last ten months. If the index were to retreat to its median level based on data from 1957 forward, the estimated loss is now 43%.

Read this week's MTI.

The S&P 500’s estimated bottom-up operating EPS rebounded 4% to $58.48 in the second month of results (Chart 1). With Q2 reporting essentially complete, EPS is now slightly above where it stood before reporting began. After the sharp dip during the first month of Q2 earnings announcements, we’ve resumed the recent and very positive “no-erosion” trend in aggregate EPS.

With Fed rate cuts likely to begin just days from now, the mathematical connection between changing rates and duration means that lower rates are almost certain to result in higher bond prices, an effect that has proven reliable since 2024’s high point in rates last April.  The simple approach of targeting longer durations is complicated by today’s inverted curve, meaning that lower rates will almost surely not manifest themselves through a parallel downward shift in the curve, but will be accompanied by an un-inversion that will return rates to an upward sloping shape.  This twist in the curve’s slope will require investors to target the appropriate spot on the curve to optimize the interest rate effect on bond prices.

Read this week's Major Trend. 

Read this week's Major Trend. 

Read this week's Major Trend. 

The Major Trend Index further deteriorated during July, going from Neutral down one notch to Low Neutral.  The Technical category - long the positive counterweight to the negative readings within the Valuation, Cyclical, and Sentiment categories – was downgraded as large-cap indexes retreated from their mid-month all-time highs.

Last month we noted that the 21-day correlation between Large Growth and Large Value turned negative for just the fifth time in 33 years. Two previous signals coincided with major rotations into the Value style.

While our tactical portfolios almost exclusively hedge equities using our proprietary short-selling strategy, last month we upped the hedge by shorting the NASDAQ 100 via the QQQ ETF. One of the driving factors is that July’s broadening action was much more of a NYSE phenomenon than a NASDAQ one—the latter market still looks highly bifurcated and triggered a “maximum-negative” reading on the HLLI in early August.

Investor sentiment has not boiled up to a “bubble” threshold during this bull market; however, last month it got high enough for an important market top to occur. The put/call ratio for the NASDAQ 100 ETF showed levels of bullish betting more extreme than those accompanying that index’s late-2021 peak.

The Lucky Bull born in March 2020 produced a 114% SPX gain during its short time in the pasture. The Luckless Bull conceived in October 2022 produced an index gain of 58% as of its July 16th peak. If last month’s high becomes the final top for the Luckless Bull, its legacy may be paltry: Current valuations imply the bull’s offspring may suffer from a similarly short lifespan and subdued productivity. 

The free-fall in industrial commodities has gotten minimal attention. Ironically, the decline took hold just as economists were cheering the jump in the U.S. Industrial Production Index to a new high for this expansion.

Employers’ preference for part-time hiring in the last year might be a reason the expansion has lasted beyond the “Sell-By” date projected by an inverted yield curve.

The stock market possess both a perfect memory and a wicked sense of irony, meaning that dates of previous market turns are more prone to repeat when conditions are right.

Market pundits christened the violent rotation in stock leadership as the “Trump Trade.” It’s more likely that the incumbent stock leaders were fated to stall before last month’s wild events. Major inflection points are sometimes accompanied by cyclical turning points in the market itself: The Y2K peak occurred just as the market broadened after two years of hyper-concentration.

The Bank of Japan’s move to life rates to 0.25% was deemed the end of the “yen carry trade,” and it drove the stock market’s fear gauge to levels reserved for history’s worst catastrophes.