Von Aldo

Does the Recent Equity Upswing Exist Simply to Fool Investors?

Each month, I like to highlight research from The Leuthold Group, which runs some mutual funds, including UGLX and the one I own in my retirment accout, LCROX. Leuthold's senior analyst Doug Ramsey, writes, under the heading, STOCK MARKET OBSERVATIONS, "The past two years have witnessed spring market tops followed by fairly steep market declines (-16.0% in 2010 and –19.4% last year). Under the 'principle of alternation'—in which price patterns vary from cycle to cycle for the sole purpose of fooling market participants—the bull market is (in my view) unlikely to top out in the spring or winter of 2012."

PSYCHOLOGY

Investor sentiment has heated up but hasn’t returned to the overheated levels that preceded the April tops of 2010 and 2011. The net reading of the MTI’s Attitudinal category stands at –190 today, compared with –359 (2010) and –437 (2011) at those two prior tops.

Among specific indicators within this category, we’re uneasy with the latest spike in NASDAQ trading volume compared to NYSE volume. Similar action in this relative volume ratio (devised by Walter Deemer) warned of the 2010 and 2011 declines.

VALUATION

While the S&P 500 5-Yr. Normalized P/E ratio has just reached 20.0x, the message from the rest of our Intrinsic Value work is not nearly so alarming—with that category only moving into net negative territory (at –9) with the latest reading. Valuations were not exceptionally inflated at either the April 2010 or April 2011 market tops—but they were certainly worse than they are

today with Intrinsic Value readings at those highs of –261 and –341, respectively.

Domestically, Mega Caps are cheaper than everything else."

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