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“Oversold” usually has a positive connotation in financial jargon, yet history’s worst air-pockets have almost always occurred when the stock market was deeply oversold. More time is needed before a “low-risk” entry point for the S&P 500 will be triggered from the VLT’s currently “oversold” status.

No surprise here—October’s rebound put technicians on alert for a “breadth thrust” for at least the fourth time since the bear market began in January. On the whole, technicians have performed better than most this year, but their obsession with new and creative ways to capture the thrust phenomenon is a sign that even this normally flexible crowd is eager to get long(er) as soon as possible.

When the economy falls into recession, labor market measures will be among the last to tell us. We can’t resist watching them anyway, for two reasons. First, we know that the Fed’s self-proclaimed data dependency is unduly reliant on lagging data points, like the monthly employment report. We want to see what the policymakers are seeing, even if that sometimes means using the same, fogged-up rearview mirror.

Value stocks have had incredible performance relative to Growth. At the end of October, IVE (iShares S&P 500 Value) had a 20% YTD advantage over IVW (iShares S&P 500 Growth). That’s easily the largest annual performance gap in favor of Value: Over the 22-year history of data, no other year reached double digits.

Our best-performing style box in October, Royal Blue Value (+14.2%), clawed its way into positive territory (+0.8%). All five of the other style boxes are trailing RB Value by 12-32% YTD.

Last month’s inversion in the 10-Yr./3-Mo. Treasury spread further tilts an already lopsided scale in favor of a U.S. recession in 2023. That spread has been considered the gold standard from an economic forecasting perspective, and is the basis for the New York Fed’s Recession Probability estimate (which, by the way, should break above its critical 35% threshold when it’s published later this month.)

Our Ratio of Ratios had a slight rebound from September’s contemporary lows. The October bounce was more pronounced in Small Caps, as that flavor of equities had its best monthly performance, relative to Large Caps, since February.

There might be “too much money chasing too few goods,” but some monetary measures imply there’s “no longer enough money” to finance production of those goods and still support a stock market that’s far from cheap.

A rotation from Growth to Value resumed in grand fashion in October. Qualitatively, new leadership sounds like a good thing. Statistically, bulls ought to hope that the tape gets back into gear.

Our Major Trend Index has four factor categories, and three of them (Valuation, Cyclical, Technical) remain negative. Yes, the bearish “trifecta.” If that sounds like a reprint of one of our Monday MTI memos, bear with us (pun intended). We thought the MTI—with over 125 inputs—was pretty exhaustive. It turns out that it’s lacking entire categories pertinent to stock market action:

With the first month of Q3-22 earnings in the books, our Up/Down ratio is 1.42, which is markedly better than the first two quarters (1.09 each). However, given falling estimates, the latest uptick probably isn’t the start of something bigger.

Given depressed market sentiment and favorable seasonality, near-term prospects look better for risky assets.

The main yield curve drivers—fiscal and monetary policies—might be suggesting a steepening move is coming soon, while bank stock performance may also be hinting at a turn in the curve. However, a durable selloff in the U.S. dollar would be needed to support a steeper yield curve, so the tightening pain could last a while longer.

With an 8% S&P 500 advance in October, our valuation measures bounced pretty hard off the contemporary lows. The estimate for downside to the median,1957-to-date, widened from -21% to -27%; while the “New Era” estimate (1995-to-date) worsened to -12% from -5% at the beginning of October. 

Read this week's Major Trend.

The U.S. Dollar Index (DXY) has gained 16.2% YTD, its best performance in almost 40 years. However, a strong dollar is bad for those with international investments, as returns are slashed when translated back into dollars. 

Read this week's Major Trend.

“Money illusion” continues to complicate analysis of the economy and financial markets. It might be a time when age and experience will actually prove helpful: Only investors who are 65 or older have experienced gaps between “nominal” and “real” data as wide as today’s.

The balanced portfolio strategy of allocating 60% to equities and 40% to fixed income generated a highly satisfactory 7.9% annualized return over the last 30 years. Despite the excellent returns earned by investors following this strategic model, the past couple of years have seen a parade of articles with headlines such as “Is the 60/40 Portfolio Obsolete?” and “Is the 60/40 Dead?” Given the central importance of this moderate allocation strategy to investment industry practices, we felt a closer look at the 60/40 portfolio was in order.

Read this week's Major Trend.