Equity Bulls Bear Burden of Proof

With little evidence that risk appetite is returning, the best thing for the bulls would be a return of quiet strength.

Asset Allocation Update: Commodities > Bonds > Stocks. The trend in Stocks vs Bonds has turned in favor of bonds after the longest continuous stretch of leadership from Stocks in over a decade. Our rules-based system has turned against Stocks in favor of Commodities and Bonds. Portfolio Applications subscribers can read more about how this shift impacts our Asset Allocation models and what it could mean for next month’s update to our Blue Heron Portfolios.

Bull markets bring quiet strength: little day-to-day movement, but lots of longer-term progress.

Bear markets bring noisy weakness: lots of day-to-day movement, but little longer-term progress.

Call it what you will but recent months have brought plenty of noise and volatility but more weakness than strength.

Market Insights: The burden of proof is on the bulls, especially in the US.

Only 43% of S&P 500 stocks are trading above their 200-day average. Long-term weekly trends for S&P 400, S&P 600 and NASDAQ 100 have rolled over. Fewer than half of the stocks in the S&P 1500 (which covers large-caps, mid-caps and small-caps) have 50-day averages above their 200-day averages.

Our industry group trend indicator has dropped into “it’s probably not just a run-of-the-mill pullback” zone.

The global picture remains brighter than it is in the US: our ACWI market trend indicator is expanding; new highs continue to outnumber new lows; and the percentage of markets above their 50-day averages is clinging to a bullish reading above 70%.

Corporate bond yields and the earnings revision trend suggest that the macro picture is not providing much support for the bulls.