February's Correction: Buyable Weakness?

We believe the decline from the broadly-inclusive market highs of late January is a yet another late-cycle correction and not the first installment of something more sinister. But we are flexible in that view and remain open to evidence tilting toward the latter possibility.

A major argument against an imminent lapse into a bear is simply the recent behavior of the stock market itself. While every market top unfolds in its own unique way, there are some common threads that (to our eyes) have yet to reveal themselves—including a transition away from cyclical leadership and an overall thinning in participation in which breadth measures, like advance/decline lines and equal-weighted indexes, not only underperform but fail to confirm ongoing highs in the DJIA and S&P 500. In fact, evidence of such a distribution process has failed to appear at any point in the upswing off of the 2015-2016 correction lows.

While the above observations are technical in nature, we infer from them that the Fed’s timid tightening gestures have so far failed to register for the most cyclically sensitive groups.

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