Latest Research

The correction in the S&P 500 since its high on January 3rd qualifies as a “severe” correction, which we define as a decline of at least -12% based on daily closing prices. What are the odds that it becomes a “major” decline*—in which the loss exceeds -19%?

In Section I, we review the history of severe corrections since 1950. In Section II, those corrections are analyzed in the context of the economic cycle, consumer sentiment, and other underlying factors—ones that might help us determine if today’s stock-market weakness is “buyable.” 

A replay of a Zoom Call with Chief Investment Strategist, Jim Paulsen where he shared his thoughts and observations on today's market and what he sees looking ahead. The slides are available through the PDF Download.

Read this week's Major Trend Index

Read this week's Major Trend. 

Longstanding concerns over the stock market’s lofty price tag are frequently dismissed with the observation that “valuations are not helpful timing tools.” We don’t disagree. In that spirit, then, let’s review three simple trend-following models that have been useful timing tools.

Prior to the Russian invasion of Ukraine, 10-year Treasury yields bumped above 2% for the first time since July 2019. While that level may strike seasoned investors as insanely low, a 2% yield is now within a few basis points of the ten-year moving average of 2.04%.

Many investors will instinctively salivate at lower prices, whether or not they represent good value. Is there a better way to temper this Pavlovian impulse and improve results? We found it’s better to wait 25 days before re-entering the market after a 10%-correction threshold is breached.

Those who want validation to buy aggressively with the market down 10% can reference two historically reliable, intermediate-term sentiment measures with fresh BUY signals—and there’s a third one that’s also very close to triggering a BUY. The problem is that boundaries defining extreme psychology change over time—with a key inflection occurring as the market transitions from bull to bear.

For months, we’ve argued there are two ways of thinking about the current economic cycle. Economist types are likely to side with their brethren at the NBER, who say the recovery has entered its 23rd month. But those observing the broad range of economic and financial gauges might view this cycle as a  single economic expansion dating back to mid-2009.

PPI and CPI inflation reached levels that were “too hot to handle” last April and July, respectively, yet the blue chips kept going up through year-end. Large Cap investors who trimmed stocks in response to the violation of these long-time inflation speed limits, however, haven’t missed out on much, and Small Cap investors who did so are happy.

The concept of “mean reversion” used to help build massive fortunes. Of late, a better mantra has been “maximum attraction,” as valuations and bullish psychology have matched or surpassed excesses of the Y2K Tech bubble. Meanwhile, corporate profit margins, once dubbed “the most mean-reverting series in finance” by Jeremy Grantham, have now topped those seen near the Y2K top by more than 50%.

Washed-out investor sentiment and “oversold” stock market oscillators are usually good reasons to get more invested in stocks. But in the case of super-oversold conditions, it is commonly a forewarning that another wave of selling is yet to come.

Like Gonzaga in the NCAA basketball tournament, stock market bulls are set for their first real test in a very long time.

AdvantHedge was up 0.3% in February, trailing the inverse S&P 500 (+3.0%), but ahead of the inverse Russell 2000 (-1.1%). Speculative growth underperformance contributed positive returns, primarily through exposure to the Application Software industry.

The Leuthold Core and Global portfolios were both slightly down during February, with successful equity positioning and exposure to gold buffering them from the selloff in the broad equity market. 

Exchange Traded Funds came to life in early 1993 with the launch of SPY, a passive fund tracking the S&P 500. Subsequent ETFs followed in the S&P MidCap 400 (MDY), the Dow Jones Industrial Average (DIA), and the NASDAQ 100 (QQQ). Still, six years after SPY’s debut there were only four domestic equity ETFs outstanding at the end of 1999.

Read this week's Major Trend.

The S&P 500 suffered its first back-to-back monthly decline since the fall of 2020. From its month-end closing high in December to the end of February, the index has shed 8.2%. Over those two months, our downside-to-median estimates have both shrunk by a similar 7%.

The Tech giant—formerly known as Facebook—shed a dramatic 33% of its market value in February. A shocking reversal among the seemingly bulletproof Social/Mobile/Cloud names. That trouncing, combined with much more subtle losses from the much larger AAPL and MSFT, contributed 40% of the S&P 500 losses for the month.

Our Royal Blue Growth segment was far and away the worst performing style box in February (again). That once-powerhouse segment has already lost 16.3% YTD. In the last 18 months, Small Cap Value has almost entirely erased Small Cap Growth’s last five years of outperformance.