Transcript Global Major Trend Index - Legend Financial Advisors, Inc.&#174

Navigating A Mature Bull Market
Douglas Ramsey, CFA, CMT
July 27, 2011
FOR PROFESSIONAL USE ONLY. FURTHER DISTRIBUTION OF THE INFORMATION CONTAINED HEREIN IS PROHIBITED WITHOUT PRIOR PERMISSION.
Disclosures
This report is not a solicitation or offer to buy or sell securities. The Leuthold Group, LLC provides research to institutional investors. It is also a registered investment advisor
that uses its own research, along with other data, in making investment decisions for its managed accounts. As a result, The Leuthold Group, LLC may have executed transactions
for its managed accounts in securities mentioned prior to this publication. The information contained in The Leuthold Group, LLC research is not, without additional data and
analysis, sufficient to form the basis of an investment decision regarding any one security. The research reflects The Leuthold Group, LLC’s views as of the date of publication,
which are subject to change without notice. The Leuthold Group, LLC does not undertake to give notice of any change in its views regarding a particular industry prior to
publication of their next research report covering that industry in the normal course of business. The Leuthold Group, LLC may make investment decisions for its managed accounts
that are inconsistent with, or contrary to, the views expressed in current Leuthold Group, LLC reports. Weeden Investors, L.P., Weeden & Co., L.P.'s parent company, owns 22% of
Leuthold Group’s voting securities. A Managing Director of Weeden & Co., L.P. is a member of The Leuthold Group, LLC board of directors. Weeden & Co., L.P. member
FINRA, NASDAQ, and SIPC.
2
The
Weight
of the
Evidence
Major Trend Index
Net
Reading
Attitudinal
-241
Economic/Interest Rates/Inflation
-333
Intrinsic Value
-226
Momentum/Breadth/Divergence
+854
Supply/Demand
Ratio of Positive to Negative Points:
-57
1.00
(mildly bullish)
Above 1.05 = Bullish
Between 0.95 and 1.05 = Neutral
Below 0.95 = Bearish
(Note: Global Major Trend Index also at 1.11 for week ended May 20th.)
3
Bull
Market:
Much
Better
Than
Normal,
So Far
Bull Markets In The Dow Jones Industrials:
Distribution Of Gains Over Time
Bear Market Low
September 24, 1900
November 9, 1903
November 15, 1907
September 25, 1911
July 30, 1914*
December 19, 1917
August 24, 1921
July 8, 1932
March 31, 1938
April 28, 1942
June 13, 1949
October 22, 1957
June 26, 1962
October 7, 1966
May 26, 1970
December 6, 1974
February 28, 1978
August 12, 1982
October 19, 1987
October 11, 1990
August 31, 1998
October 9, 2002
March 9, 2009
# Observations
3 Mos.
23.1
11.5
11.6
12.6
8.7
18.5
19.5
48.4
35.3
14.6
13.4
7.4
8.0
8.7
20.5
31.9
12.1
33.9
11.4
5.8
20.9
20.4
33.8
6 Mos.
29.9
15.5
40.3
21.4
34.8
22.7
33.3
52.7
43.0
21.7
21.8
7.1
21.6
14.6
22.7
45.4
19.2
38.4
15.0
22.8
23.4
12.5
45.8
1 Yr.
59.1
66.2
28.0
84.5
24.9
56.0
155.1
44.4
40.1
29.2
32.3
24.8
43.6
41.8
9.0
52.2
22.9
26.2
43.6
32.9
61.4
Cumulative Bull Market Price Gain (%)
2 Yrs.
3 Yrs.
4 Yrs.
5 Yrs.
6 Yrs.
7 Yrs.
8 Yrs.
265.7
487.5
93.5
87.4
43.8
135.7
62.0
197.3
123.4
278.9
152.7
194.3
46.6
54.7
49.0
55.1
28.5
53.9
121.8
66.2
37.6
59.5
64.5
68.1
99.3
172.4
69.2
136.3
243.6
51.9
63.9
100.2
41.3
62.7
94.4
15.1
56.8
54.3
32.6
38.0
86.5
152.4
240.2
Total
Gain (%)
47.8
144.3
89.6
29.1
110.5
81.4
495.2
371.6
60.1
128.7
222.4
75.1
85.7
32.4
66.6
75.7
38.0
250.4
72.5
294.8
55.5
94.4
93.9
23
23
21
15
9
7
5
3
2
1
22
Average
18.8
27.2
46.6
58.2
78.5
114.0
138.0
173.0
252.9
487.5
131.1
Median
14.6
22.7
41.8
54.1
62.0
68.1
100.2
172.4
252.9
487.5
83.6
© 2011 The Leuthold Group
*Adjusted for closing of NYSE in second half of 1914.
The blast off the
March 2009 low ranks
as the largest twoyear gain since the
move off the 1932
low.
4
Is The Market Too
Strong To Form A
Final Top?
Stock Market Vs. Historical
"Points of Recognition"
© 2011 The Leuthold Group
2400
1800
1400
1000
800
600
S&P 500
The bull market peak in prices rarely coincides with the bull market peak in
momentum. (The exceptions were 1938 and 1980.) The
new "momentum high" recorded in February therefore
points to even higher prices ahead.
400
200
Momentum*
90
80
70
60
50
40
30
20
1930
1940
1950
1960
1970
1980
*Momentum measured by 14-wk. Relative Strength Index (RSI).
5
1990
2000
2010
Too
Strong To
Top Out?
(cont.)
Proximity Of Bull Market Peaks to "Momentum Peaks", 1900 To Date
(Momentum Measured By 14-Wk. S&P 500* Relative Strength Index)
(*Dow Jones Industrials Used Prior To 1930)
Weekly Price Low to
Weekly Price High
Advance Duration
%
(Weeks)
Bull Market Dates
(based on weekly closing prices)
September 22, 1900 - June 28, 1901
November 14, 1903 - January 20, 1906
November 16, 1907 - October 2, 1909
July 30, 1914 - November 18, 1916
December 15, 1917 - November 1, 1919
August 20, 1921 - August 30, 1929
July 8, 1932 - March 5, 1937
March 25, 1938 - November 11, 1938
April 24, 1942 - May 31, 1946
June 10, 1949 - August 3, 1956
October 18, 1957 - December 8, 1961
June 22, 1962 - February 11, 1966
October 7, 1966 - November 29, 1968
May 22, 1970 - January 5, 1973
October 4, 1974 - December 31, 1976
March 3, 1978 - November 28, 1980
August 6, 1982 - August 21, 1987
December 4, 1987 - July 13, 1990
October 12, 1990 - July 17, 1998
September 4, 1998 - March 24, 2000
October 4, 2002 - October 12, 2007
Medians
1900 To Date
Current bull market:
March 9, 2009 -
Weekly Price Low
to Momentum High
Advance Duration
%
(Weeks)
Momentum High to
Weekly Price High
Advance
Duration
%
(Weeks)
45.9
138.1
86.5
110.5
75.7
484.3
318.8
49.8
153.4
259.4
82.5
78.1
48.0
65.9
72.4
60.7
223.9
64.0
295.5
56.8
95.1
92
114
98
120
98
419
242
33
214
373
216
190
112
137
117
143
263
136
405
81
262
28.6
68.9
57.5
83.7
59.3
346.8
232.5
49.8
74.9
208.8
41.8
52.9
29.0
36.2
61.8
60.7
128.1
58.0
105.8
30.9
42.6
8
55
38
64
77
380
188
33
116
317
66
95
30
38
69
143
188
91
269
19
68
82.5
137
59.3
69
18.4
?
96.5
102
?
?
13.5
41.0
18.4
14.6
10.3
30.8
26.0
0.0
44.9
16.4
28.6
16.5
14.8
21.8
6.5
0.0
42.0
3.8
92.2
19.8
36.8
84
59
60
56
21
39
54
0
98
56
150
95
82
99
48
0
75
45
136
63
194
60
?
Among the 21 completed cyclical bull markets
since 1900, only two have topped out coincident
with the high in price momentum.
6
Psychological
Turning
Point?
© 2011 The Leuthold Group
Bull Market "Points Of Recognition" Are
Usually Followed By Accelerating Job Growth
bad
signal
Feb
Arrows denote the "momentum high" of a cyclical bull market. These can be thought of as
bull market "points of recognition", and are usually followed by stronger employment
growth--even when the economic recovery is fairly mature.
1950
1960
1970
1980
1990
2000
2010
Dividend Growth
Suddenly
Accelerating
S&P 500
Dividends Per
Share
7
28
27
26
24
© 2011 The Leuthold Group
2008
29
25
Point of
Recognition
2007
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
23
22
21
2009
2010
2011
Secondary
“BUY” Signal
From VLT



A traditional, low-risk VLT BUY signal occurs when
VLT Momentum—which can be though of as
roughly a smoothed, annual rate of change —turns
up after having declined below zero. But we have
also considered whether there might be validity to a
sort of “moderate-risk” or “high-risk” market BUY
signal occurring when VLT Momentum turns up
from an already overbought level—i.e., from above
the zero line. Results of this analysis are shown below and on the following page.
VLT Momentum:
"Bull Market Extension" Signals
1900 To Date
2000
1500
1100
800
600
S&P 500
1928 To Date
400
300
bad cluster of signals
during 1966-1982
secular bear market
DJIA
200
1900-1928
100
Since 1900, VLT Momentum has become
“oversold” (dropping into negative territory) 30
times—an average of once every 3.7 years. VLT inevitably turns positive some time afterward (although
some bears fail to see the inevitably of this). Then
VLT will inevitably roll over while still in positive
territory (though some bulls fail to see the inevitably
of that). In just over half of the cases (17 of 30), VLT
will then manage to turn back up while still in positive territory (highlighted by the arrows below).
A few of these “secondary” VLT upturns occur perilously close to market tops, such as ones occurring
during the 1966-1982 secular bear market. But, on
the whole, such secondary VLT upturns should be
viewed as moderate -risk, “bull market extension”
signals.
50
0
Very Long Term (VLT) Momentum
© 2011 The Leuthold Group
1900
1910
1920
1930
1940
1950
1960
1970
1980
Arrows denote moderate-risk bull market extension signals occurring when VLT Momentum turns up from
already overbought levels (i.e., from above zero).
8
1990
-50
2000
2010
2020
VLT Upturn =
Bull Market
Extension?


The results are remarkably similar to
those of the Point of Recognition
study in last month’s Green Book.
The past sixteen VLT “bull market
extension” signals have been followed by median additional market
gains of about +17% occurring over
a median of 62 weeks (14 months).
VLT “market extension” signals fell
flat in 1917 and 1948, with no additional gains. On the other hand, extension signals preceded the terrific
gains leading up to the 1929, 1987
and 2000 market tops. Considering
the stage of the economic recovery
(approaching two years), valuation
levels (on the high side of neutral),
and investor attitudes (heating up but
not yet frothy), we are inclined to
believe the median numbers sound
about right.
Very Long Term (VLT) Momentum:
Bull Market Extension Signals
Date Of
Weekly VLT Low
(Below Zero)
VLT Upturn
Above Zero?
November 17, 1900
April 23, 1904
March 14, 1908
January 14, 1911
December 27, 1913
June 14, 1918
April 15, 1921
May 23, 1924
August 12, 1932
April 26, 1935
July 22, 1938
March 1, 1940
September 11, 1942
July 25, 1947
October 7, 1949
February 5, 1954
July 4, 1958
December 23, 1960
January 25, 1963
February 3, 1967
September 4, 1970
January 24, 1975
April 21, 1978
August 20, 1982
January 4, 1985
September 23, 1988
February 1, 1991
February 10, 1995
April 11, 2003
June 5, 2009
No
No
Yes
No
Yes
No
No
Yes
No
No
No
No
Yes
Yes
Yes
Yes
No
No
Yes
Yes
Yes
Yes
Yes
No
Yes
No
Yes
Yes
Yes
Yes
Pct. Of Time VLT
Turns Back Up =
57%
Date Of Secondary
VLT Upturn
No. Of
Weeks
To Peak
May 28, 1909
9.0 %
June 15, 1917
0.0
0
March 4, 1927
138.9
130
October 20, 1944
October 22, 1948
January 12, 1951
June 24, 1955
47.2
0.0
25.8
21.2
84
0
103
58
July 10, 1964
October 11, 1968
July 14, 1972
July 23, 1976
September 21, 1979
12.5
5.0
12.2
3.3
27.2
83
7
25
23
62
November 1, 1985
75.4
94
November 20, 1992
February 14, 1997
June 24, 2005
January 28, 2011
12.2
88.9
31.1
?
62
162
120
?
Average
Median
31.9 %
16.9 %
Analysis based on DJIA prior to 1928; S&P 500 thereafter.
© 2011 The Leuthold Group
9
Additional
Gain
To Peak
(%)
18
64
62
Bull Market
Extensions &
The Fed


Traditionally we have believed that policy officials are
typically given more blame (or credit, for that matter)
for market movements than is justified. Nonetheless,
in the course of the “bull market extension” study we
could not help but notice that the VLT charts are
heavily imprinted by Greenspan and Bernanke
“hoof prints” (... bears have paws, but bulls have
hoofs). VLT had historically demonstrated a nice, reliable rhythm prior to the mid-1980s, dropping below
zero every 3-5 years and then ushering in a new bull
market. But check out the monthly VLT reading on
the DJIA at right. Following the 1987 crash, VLT first
moved back into positive territory in February 1989—
and then proceeded to remain positive for 144 consecutive months (12 years). This was more than double the previous record positive streak of 68 months—
which occurred during the latter half of the 1920s.
It may be coincidence, but three of the worst bear markets in history followed these episodes in which the
normal, VLT “bull market extension” became hyperextended. I certainly don’t wish for the current bull
market to once again go into "hyper-extension” mode
(... and sane investors shouldn’t either). Again, a typical bull market extension would lead to further gains
of +15-20% over a period of about a year. Such a
move would probably push the market into the low
end of “overvalued” territory on many of our measures—but not to the extent seen in 2007 and not even
close to 2000. If the bull market were to extend significantly beyond the median case in duration or magnitude (or both), then the final outcome could well
someday appear in the table at right...
Maestro published
Sen. Moynihan calls Greenspan
"a national treasure"
Greenspan knighted by
Queen Elizabeth II
Dow Jones Industrial Average -
© 2011 The Leuthold Group
VLT Momentum (Monthly)
50
0
-50
1910
1920
1930
1940
1950
1960
1970
1980
68
mos.
1990
2000
144 months
Dates
VLT Above Zero
Length
Subsequent
Drop in DJIA
August 1924 - March 1930
68 months
-89%
February 1989 - January 2001
144 months
-38%
October 2003 - May 2008
56 months
-54%
© 2011 The Leuthold Group
10
2010
56
mos.
Bull Market
Extensions &
Leadership

The table at right compares Small and Large Cap
performance from the market low associated with
an oversold VLT reading to the market high associated with the first overbought VLT reading.
(In many cases, this represents the entire bull
market.) Note that Small Caps have outperformed Large Caps by a median of +22% during
this recovery phase. However, the results are a
push for bull markets which enjoyed an
“extended phase” (again, as identified by a secondary upturn in VLT Momentum). Large Caps
outperformed in six of the 11 completed “bull
market extensions”, and the median gains for
Small and Large Caps are comparable. The best
one might be able to say is that Small Caps tend
to underperform on a beta-adjusted basis during
these extended phases.
Bull Market Extensions &
Large Vs. Small Cap Leadership
Bull Market Extension
(after VLT turns up while above zero)
Recovery From Oversold Low
Dates
Small
Cap
%
Large
Cap
%
Jul32 - Jan34
Apr35 - Feb37
Apr38 - Dec38
Mar40
May42 - Oct44
Mar48 - Jun48
Jul49 - Jan51
Sep53 - Jun55
Jan58 - Jul59
Nov60 - Dec61
Jul62 - Jul64
Oct66 - Oct68
Jul70 - Jul72
Oct74 - Jun76
Mar78 - Sep79
Aug82 - Jun83
Jun84 - Oct85
Dec87 - Jun90
Oct90 - Nov92
Dec94 - Feb97
Nov02 - Jun05
Feb09 - Jan11
248.1 %
245.8
90.6
6.4
246.3
26.6
93.4
80.1
87.5
42.4
61.7
140.7
57.3
108.8
71.6
97.9
17.1
44.9
71.6
61.4
91.9
106.1
100.0 %
132.7
61.0
1.3
92.3
21.5
72.6
92.7
59.8
39.1
62.5
44.3
57.9
76.8
36.2
64.5
34.4
70.0
51.2
83.7
41.0
82.1
83.8 %
61.8 %
Median
Large cap returns for S&P 500.
Small Cap returns from Ibbotson 1932-2007 and Russell thereafter.
All figures are total returns.
© 2011 The Leuthold Group
11
Small
Cap
%
Dates
Large
Cap
%
Nov44-May46
149.6
61.2 %
**Market peaked coincident with VLT upturn.**
Feb51 - Dec52
2.6
38.0
Jun55 - Jul56
12.9
25.5
Aug64 - Jan66
Oct68
Aug72 - Dec72
Jul76 - Dec76
Oct79 - Nov80
59.8
7.6
0.1
12.2
47.2
17.0
5.3
11.4
5.1
36.9
Nov85 - Aug88
51.9
84.8
Dec92 - Jan94
Mar97 - Mar00
Jul05 - Oct07
Feb11 To Date
34.1
75.3
30.7
8.2
15.2
98.3
36.1
3.5
Median
32.4 %
30.8 %
There's no decisive leadership bias
favoring Small over Large during a
bull market extension phase signalled
by a secondary upturn in VLT
Momentum.
The Bull
Market “Sweet
Spot” For
Quants?

As shown below, high momentum
stocks hold a moderate performance edge during the “recovery”
phase of a bull market (which,
again, is defined as the move from
the low associated with an oversold VLT to the high associated
with the initial overbought peak in
VLT). But the performance advantage for high momentum
stocks is overwhelming when
(and if) the bull market moves
into an extended phase (after
VLT turns up in overbought territory). High momentum big caps
outperform their low momentum
cohorts by a median a almost
+30% during bull market extensions dating back to the 1940s.
Bull Market Extensions &
Performance Of Price Momentum
Bull Market Extension
(after VLT turns up while above zero)
Recovery From Oversold Low
Dates
Low
Momentum
%
Jul32 - Jan34
Apr35 - Feb37
Apr38 - Dec38
Mar40
May42 - Oct44
Mar48 - Jun48
Jul49 - Jan51
Sep53 - Jun55
Jan58 - Jul59
Nov60 - Dec61
Jul62 - Jul64
Oct66 - Oct68
Jul70 - Jul72
Oct74 - Jun76
Mar78 - Sep79
Aug82 - Jun83
Jun84 - Oct85
Dec87 - Jun90
Oct90 - Nov92
Dec94 - Feb97
Nov02 - Jun05
Feb09 - Jan11
Median
High
Momentum
%
125.6 %
135.4
89.3
2.3
88.6
15.9
59.5
55.4
62.1
28.7
42.3
52.2
58.0
90.8
36.5
68.9
28.4
54.8
80.3
60.8
63.2
151.6
97.2 %
131.3
47.9
2.1
105.9
28.1
87.4
113.8
71.2
44.8
69.7
64.2
66.1
95.2
61.6
75.8
34.1
79.5
61.3
83.9
43.6
74.7
60.2 %
70.5 %
Dates
High
Momentum
%
Nov44-May46
55.2
113.5 %
**Market peaked coincident with VLT upturn.**
Feb51 - Dec52
19.5
41.4
Jun55 - Jul56
12.2
22.9
Aug64 - Jan66
Oct68
Aug72 - Dec72
Jul76 - Dec76
Oct79 - Nov80
15.2
5.3
14.3
1.5
11.4
42.9
8.4
6.7
5.8
85.4
Nov85 - Aug88
93.7
86.4
Dec92 - Jan94
Mar97 - Mar00
Jul05 - Oct07
Feb11 To Date
1.7
48.2
33.8
32.7
154.9
49.2
Median
14.8 %
Total returns are for Ken French's High and Low Momentum Large Cap portfolios.
© 2011 The Leuthold Group
12
Low
Momentum
%
42.2 %
Bull market extensions are the ideal
environment for trend-followers.
October 9, 2007
bull market high
S&P 500
The Market
Rarely Tops
When
Everything Is
At A Top
April 29, 2011
bull market high (to date)
S&P 500
1500
1400
1000
1300
1200
Dow Jones 65
Composite
Dow Jones 65
Composite
4500
4000
3500
4000
3000
2500
3500
Dow Jones Transports
Dow Jones Transports
5500
5500
5000
4500
4000
3500
3000
2500
5000
4500
4000
3500
Dow Jones Utilities
550
400
Dow Jones Utilities
500
350
450
300
400
Russell 2000
850
Russell 2000
800
800
700
750
600
500
700
400
650
500
200
S&P 500 Financials
450
S&P 500 Financials
Market Early Warning Signals:
Prior S&P 500 Tops Vs. Today
Date of
Bull Market High
July 16, 1990
July 17, 1998
March 24, 2000
October 9, 2007
Subsequent
Decline
-19.9 %
-19.3
-49.1
-56.8
Dow 65
Composite
Warning?
1
1
1
1
350
Dow
Transports
Warning?
1
1
1
1
Dow
Utilities
Warning?
Russell
2000
Warning?
1
0
1
1
1
1
0
1
S&P 500
Financials
Warning?
1
0
1
1
MS
Cyclical
Warning?
1
1
1
1
NYSE
A/D Line
Warning?
1
1
1
1
Average:
-16.0
NA
0
0
150
100
300
Total
Number of
Warnings*
0
0
1
0
0
0
0
1
0
0
0
0
1100
Morgan Stanley
Cyclical Index
1000
1000
Morgan Stanley
Cyclical Index
900
7
5
6
7
800
1
1
*A warning from each indicator is issued when it fails to "confirm" a bull market price high
within the preceding 21 trading days (one month).
© 2011 The Leuthold Group
2006
Usually most of these internal market measures will
deteriorate before the final bull market peak is achieved.
But as of the April 29th high, only the financial stocks
have raised a warning flag.
13
2007
NYSE
Advance/Decline
Line
25000
20000
x10
© 2011 The Leuthold Group
500
700
NYSE
Advance/Decline
Line
6.3
Important Highs, March 2009 To Date
April 23, 2010
April 29, 2011
400
2008
Every important
subgroup was lagging
the S&P 500 at the 2007
bull market high.
© 2011 The Leuthold Group
2009
30000
25000
x10
20000
2010
2011
Only the financial
stocks failed to make a new high
in April. "Internal" weakness
should become more obvious
before the final top.
© 2011 The Leuthold Group
+15%
S&P 500
High Beta Index
Shift Away
From High Beta
Not A Bull
Market Death
Knell
7000
6000
+178%
5000
4000
Last 15 months
(March 9, 2010 to
June 3, 2011)
First year off bear market low
(March 9, 2009 to
March 9, 2010)
S&P 500
Low Volatility
Index
A M J J
2000
4000
+14%
Is The
"Beta Trade"
Over?
+46%
2009
2009
2010
A S O N D 2010
A M J
J A S O N D 2011
2011
A M J
3000
2500
1600
1500
2002-07 Bull Market
6000
3500
J A S
© 2011 The Leuthold Group
© 2011 The Leuthold Group
3000
1400
1300
5800
S&P 500
5600
1200
1100
1000
5400
900
5200
High beta stocks peaked on a relative basis
only 15 months into the 2002-2007 bull
market... but there was still almost four more
years of bull market to come.
5000
S&P 500
High Beta
Index
4800
S&P 500 High Beta Index
Relative Strength vs.
S&P 500
4400
2002
Aug Sep Oct Nov Dec 2011
Mar
Apr May Jun
450
400
350
300
4000
Jul
600
550
500
4600
4200
Jun
800
Jul
14
2003
2004
2005
2006
2007
2008
Will The
Fabled Election
Cycle Work
Again?
Presidential Election Cycle in the S&P 500, 1926 To Date
22.0
© 2011 The Leuthold Group
20.0
+17.6%
18.0
16.0
14.0
S&P 500 12.0
Annualized 10.0
Total Return
8.0
+9.5%
+6.6%
+5.9%
6.0
4.0
2.0
0.0
Post-Election
1
Year
Mid-Term
2
Year
Pre-Election
3
Year
Election
4
Year
S&P 500 Cumulative Total Return During
Four-Year Election Cycle, 1926 To Date
160
150
140
130
120
Today
110
100
Bullish PRE-ELECTION Market Phase:
November of Mid-Term Year Through
January of Election Year
90
© 2011 The Leuthold Group
80
0
Post-Election Year
15
12
Mid-Term Year
24
Pre-Election Year
36
Election Year
48
Pre-Election
Effect
Pervasive
Across Asset
Classes
PERFORMANCE OF MAJOR ASSET CLASSES
IN THE "GOOD" AND "BAD" PHASES OF THE ELECTION CYCLE
STOCKS
Large Vs. Small
Large Company Stocks* (Total Return)
Small Company Stocks* (Total Return)
(A)
Annualized
Performance,
Pre-Election Phase
of 4-Yr. Cycle
(B)
Annualized
Performance,
Rest of
4-Yr. Cycle
Annualized
Performance Spread,
Pre-Election Minus
Remaining Phase of
4-Yr. Cycle
(November of Mid-Term
Year Through January
of Election Year)
(February of Election Year
Through October of
Mid-Term Year)
Column (A)
Minus
Column (B)
1926-2010
1926-2010
18.0%
26.8%
6.1%
5.6%
11.9%
21.2%
Growth Vs. Value
Russell 1000 Growth (Total Return)
Russell 1000 Value (Total Return)
1979 to date
1979 to date
22.1%
18.0%
4.9%
8.8%
17.2%
9.2%
Cyclical Vs. Consumer
Morgan Stanley Cyclical Index
Morgan Stanley Consumer Index
1978 to date
1978 to date
22.9%
15.6%
3.6%
12.2%
19.3%
3.4%
Other Indexes
NASDAQ Composite
Barron's Gold Mining Index
1971 to date
1975 to date
29.9%
16.1%
-0.6%
-2.2%
30.5%
18.3%
1962 to date
1962 to date
1962 to date
+9bp
-30bp
+39bp
-9bp
+6bp
-15bp
18bp
-36bp
54bp
1957 to date
4.3%
0.5%
3.8%
*Ibbotson SBBI
BONDS/INTEREST RATES
10-Yr. Treasury Bond Yield**
1-Yr. Treasury Bill Rate**
Yield Curve (10-Yr. Minus 1-Yr.)**
**Performance shown as change in basis points
COMMODITIES
CRB Futures Index
© 2011 The Leuthold Group
16
Stocks are
much
stronger
during the
favorable,
15-month
preelection
phase...
particularly
higher beta
groups like
Small
Caps,
Cyclicals,
NASDAQ
and Growth
stocks.
Sell In May And
Go Away??
YES, If You Own
Small Caps
36
34
32
30
28
26
24
Annualized 22
Total 20
Return 18
16
14
12
10
8
6
4
2
0
Annual Seasonal Cycle:
Large Caps Vs. Small Caps, 1950 To Date
© 2011 The Leuthold Group
Large Caps
Small Caps
+27.6%
+17.5%
+5.3%
+1.4%
Favorable
1
Phase Of Cycle
(Nov-Apr)
Unfavorable
2
Phase Of Cycle
(May-Oct)
Favorable
3
Phase Of Cycle
(Nov-Apr)
Small Cap Stocks:
Seasonal Switching Strategies Vs.
Buy & Hold, 1950 To Date
Unfavorable
4
Phase Of Cycle
(May-Oct)
Own Small Caps from November through April,
sit in T-Bills rest of time.
+15.6%/yr.
20000
14000
10000
7000
5000
3000
2000
[Small Cap Stocks total returns from Ibbotson SBBI, except for
first four months of 2011 (Russell 2000).]
Buy & Hold
Small Cap Stocks
1000
+13.8%/Yr.
Own Small Caps from
May through October, sit in
T-Bills rest of time.
+3.0%/yr.
© 2011 The Leuthold Group
1950 1950s
1960 1960s
17
1970 1970s
1980 1980s
1990 1990s
2000 2000s
2010 2010s
2020
Sell In May And
Go Away??
(cont.)
SECTOR PERFORMANCE* DURING THE TWO
"GOOD" AND "BAD" PHASES OF THE ANNUAL MARKET CYCLE
October 1989 - April 2011
S&P 500 Sectors
(A)
Annualized
Performance,
November
through April
(B)
Annualized
Performance,
May through
October
Annualized
Performance Spread,
"Good" Minus
"Bad" Phase Of
Annual Cycle
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunications Services
Utilities
18.7%
7.2%
17.1%
10.1%
8.6%
18.1%
14.6%
19.3%
2.8%
4.3%
-4.1%
9.3%
2.4%
-0.7%
8.6%
-3.2%
3.0%
-7.0%
0.7%
1.0%
22.8%
-2.1%
14.7%
10.8%
0.0%
21.3%
11.6%
26.3%
2.1%
3.3%
S&P 500
12.0%
1.1%
10.9%
*Performance results exclude dividends.
© 2011 The Leuthold Group
18
Seasonal
performance
gap has
been
enormous in
the most
cyclical
sectors.
Pre-Election Cycle
Stronger Than
Annual Cycle
Annual & Presidential Election Cycles Combined:
S&P 500, 1926 To Date
S&P 500
Annualized
Total
Return
34
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
© 2011 The Leuthold Group
Remaining 33 Months Of Cycle
15-Month Pre-Election Cycle
+23.6%
(19% of time)
+10.7%
(12% of time)
+7.2%
(31% of time)
+3.2%
(38% of time)
Favorable
1
Phase Of
Annual Cycle
(Nov-Apr)
Unfavorable
2
Phase Of
Annual Cycle
(May-Oct)
Favorable
3
Phase Of Cycle
(Nov-Apr)
current phase
19
Unfavorable
4
Phase Of Cycle
(May-Oct)
World Valuations:
Old “Support” Could
Become New “Resistance”
MSCI World Index P/E on 5-Yr. Normalized EPS
(Based on 20-quarter moving avg. of 12-Mo. Trailing EPS)
Global tech &
telecom bubble
Global bubbles in
housing &
financial
engineering
Japanese
market bubble
Oct 2007
26.3x
Global stocks
found "support" at
18x earnings
during the 1990
and 2000-02 bear
markets. That
same valuation
level could provide
"resistance" in
current bull market
(and maybe in the
next one, too).
45
40
35
30
25
20
Sep 1990
18.0x
Oct 2002
18.0x
Mar 2009
8.8x
© 2011 The Leuthold Group
1970
15
1980
1990
2000
2010
10
July 15, 2011
16.5x
5
2020
Basing period before launch of
March 9, 2009 =
next secular bull market
secular
(Please do not consider the seesaw
bear market
path we have drawn a forecast.)
low
20
U.S. Valuations:
Today Vs. Past Seven
Bull Market Peaks
U.S. P/E Ratios At Bull Market Peaks
MSCI USA P/E on 5-Yr. Normalized EPS
Mar 2000
38.7x
Jul 1998
36.1x
(Based on 5-Yr. moving avg. of 12-Mo. Trailing EPS)
45
40
35
Median Normalized
Oct 2007
25.2x
P/E at seven previous
Jul 1990
18.3x
Sep 1982
14.5x
25
July 15, 2011 = 18.8x
Nov 1980
11.9x
Median Normalized
P/E for entire 19752011 period =
18.2x
© 2011 The Leuthold Group
1970
1980
30
bull market peaks =
21.4x
Aug 1987
21.4x
1990
2000
21
2010
20
15
10
Foreign Valuations:
Today Vs. Past Seven
Bull Market Peaks
Foreign P/E Ratios At Bull Market Peaks
Median Developed Country Ex U.S. P/E on 5-Yr. Normalized EPS
Jul 1998
32.2x
(Based on 5-Yr. moving avg. of 12-Mo. Trailing EPS)
40
Mar 2000
28.6x
Aug 1987
26.9x
Jul 1990
21.0x
Oct 2007
29.4x
Median Normalized
P/E at seven previous
bull market peaks =
26.9x
35
30
25
Sep 1976
11.0x
Nov 1980
13.9x
20
15
June 30, 2011 = 13.0x
Median Normalized
P/E for entire 19752011 period =
17.9x
10
© 2011 The Leuthold Group
1970
5
1980
1990
2000
22
2010
Valuation:
What Works &
What Doesn’t?
Large Cap Valuation Measures:
Current Readings, Historical Rankings & Forecasting Power
Available
History
May 31, 2011
Reading
Current
Percentile
Ranking
Correlation
With 5-Yr.
Forward
Total Return*
Traditional Valuation Ratios
S&P 500 P/E on Trailing 12-Mo. EPS
S&P 500 Dividend Yield
S&P Industrials Price-to-Book
S&P Industrials Price/Cash Flow
S&P Industrials Price/Sales
1936 To Date
1928 To Date
1926 To Date
1946 To Date
1955 To Date
16.5x
1.94%
2.85x
11.2x
1.40x
52
86
80
84
87
-0.50
0.52
-0.40
-0.69
-0.67
P/E Ratios Based on Normalized EPS
S&P 500 P/E on Leuthold 5-Yr. Normalized EPS
S&P Industrials P/E on ROE-based Normalized EPS
S&P Industrials P/E on ROS-based Normalized EPS
1926 To Date
1930 To Date
1955 To Date
20.1x
19.4x
21.5x
77
67
74
-0.58
-0.64
-0.49
Valuation Measures - Adjusted For Interest Rates
Ratio, 10-Yr. Bond Yield to S&P 500 Earnings Yield*
Ben Graham Intrinsic Value Model*
1926 To Date
1926 To Date
0.61
+10%
37
52
-0.13
-0.20
*based on Leuthold's S&P 500 5-Yr. Normalized EPS
Adjusting
valuation
measures for
interest rates
detracts from
their
forecasting
power.
© 2011 The Leuthold Group
23
The
Price/Cash
Flow ratio has
shown the
best ability to
forecast future
market
returns.
New Short
Position in
10-Yr.
Treasury
Zeros
5.5
RS Ratio,
Morgan Stanley Cyclical Index/
Morgan Stanley
Consumer Index
5.0
4.5
4.0
Bonds &
Cyclical Stocks
Send Conflicting
Messages
3.5
3.0
2.5
10-Yr. U.S.
T-Bond Yield
2.0
© 2011 The Leuthold Group
2004
2005
2006
2007
2008
Morgan
10-Yr.
10-Yr.
Stanley
Treasury
Treasury
Cyclical/
Bond
Bond
Yield
Yield
2009Morgan
2010
2011
Morgan Stanley Consumer RS Ratio
August 27, 2010:
Bernanke speech
announcing second
round of QE.
24
2012
Sector
Strategy:
Buy The
“Bridesmaid”,
Not The
Bride!
Pure Momentum
Strategy
(Own prior
year's best
sector)
S&P 500
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1991-2010,
Annualized
Bridesmaid
Strategy
(Own prior
year's 2nd
best sector)
26.3 %
4.5
7.1
-1.5
34.1
20.3
31.0
26.7
19.5
-10.1
-13.0
-23.4
26.4
9.0
3.0
13.6
3.5
-38.5
23.5
12.8
?
50.2 %
-18.7
7.8
19.1
38.8
18.8
28.1
9.6
78.4
-41.0
-32.5
-24.4
9.2
2.1
29.1
22.2
8.4
-35.9
11.2
9.1
?
38.4 %
19.8
12.8
-4.8
54.5
31.9
45.4
42.3
17.4
-20.7
-12.9
-7.7
34.8
12.1
12.8
16.9
32.4
-47.0
17.1
19.9
?
6.9 %
5.5 %
12.7 %
Results assume annual rebalancing of S&P 500 sectors;
numbers exclude dividends & transactions costs.
25
Bridesmaid
Sector
Consumer Staples
Financials
Consumer Discretionary
Industrials
Health Care
Financials
Financials
Health Care
Telecom Services
Consumer Discretionary
Health Care
Materials
Materials
Consumer Discretionary
Utilities
Utilities
Energy
Materials
Health Care
Materials
Industrials
© 2011 The Leuthold Group
“Bridesmaid”
Strategy:
Also Effective
Across Asset
Classes!
Year
S&P 500
Total Return
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1973-2010, Ann.
Total Return
Std. Deviation
Bridesmaid
Strategy
(Own Previous
Year's Runner-Up
Asset Class)
Total Return
-14.7 %
-26.5
37.2
23.8
-7.2
6.6
18.4
32.4
-4.9
21.4
22.5
6.3
32.2
18.5
5.2
16.8
31.5
-3.2
30.5
7.7
10.0
1.3
37.4
23.1
33.4
28.6
21.0
-9.1
-11.9
-22.1
28.7
10.9
4.9
15.8
5.5
-37.0
26.5
15.1
?
75.0 %
66.3
-17.2
23.8
19.1
37.0
6.2
39.9
-4.9
31.6
25.5
14.8
5.9
18.5
-2.7
27.9
38.3
-3.2
19.3
12.2
18.5
3.1
20.3
17.6
-14.1
-7.3
27.4
-3.6
15.5
5.2
20.9
20.7
14.0
22.5
11.6
4.3
26.5
26.9
?
9.8 %
18.5
16.0 %
18.9
No. Yrs. Matching/Exceeding S&P:
26
28/38
Bridesmaid
Asset Class
Owned During Year
Commodities
Gold
Commodities
Large Caps
REITs
Gold
EAFE
Small Caps
Large Caps
REITs
REITs
REITs
REITs
Large Caps
Govt. Bonds
Commodities
Commodities
Large Caps
Govt. Bonds
REITs
REITs
Small Caps
Commodities
Small Caps
Commodities
Small Caps
EAFE
Small Caps
REITs
REITs
Gold
EAFE
EAFE
Gold
EAFE
Gold
Gold
Small Caps
REITs
© 2011 The Leuthold Group