The Bull Market:
Six Years Old… And Not Over
April 22-24, 2015
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 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
Major Trend Index
remains mildly positive
POTENTIAL
WEIGHT
+
1200
1200
1100
1100
1200
1200
600
600
1800
1800
THIS WEEK CURRENT NET READING
+
No Change
70
442
Gain 22
492
176
Gain 17
160
389
Loss 8
121
72
Loss 55
713
295
1556
1374
Intrinsic Value
Economic/Interest Rates/Inflation
Attitudinal
Supply/Demand
Momentum/Breadth/Divergence
BALANCE : +182 (+206 Last Week)
*RATIO: 1.13 (1.15 Last Week)
*Total Positive Points : Total Negative Points. (0.95 to 1.05 is a "Neutral" reading.)
3
Net
-372
316
-229
49
418
182
Market
advance has
been broad,
which is
near-term
bullish
NYSE Daily
Advance/Decline
Line - All Issues
10000
49000
48000
9500
New
highs in
mid-April
9000
47000
46000
8500
45000
8000
44000
7500
43000
NYSE Daily
Advance/Decline Line Stocks Only
7000
42000
6500
41000
© 2015 The Leuthold Group x10
x10
S
O
N
D
2014
4
M
A
M
J
J
A
S
O
N D
2015
M
A
M
New high in breadth suggests
bull market life expectancy has
been pushed out…
© 2015 The Leuthold Group
No. Of Weeks S&P 500 Gain
From Breadth From Breadth
Date Of Bull Market
Peak To
Peak To
Peak In S&P 500
Market Peak Market Peak
Date Of Peak In
NYSE Breadth
(Daily A/D Line)
A/D peaks 2 trading days after S&P
A/D line and S&P 500 peak on same day
A/D line peaks 10 months after S&P
May 14, 1928
January 21, 1937
November 12, 1938
May 29, 1946
March 15, 1956
May 17, 1961
May 6, 1965
August 2, 1967
April 28, 1971
July 22, 1977
September 11, 1978
March 23, 1987
August 8, 1989
April 3, 1998
January 6, 1999
June 4, 2007
September 7, 1929
March 6, 1937
November 9, 1938
May 29, 1946
August 2, 1956
December 12, 1961
February 9, 1966
November 29, 1968
January 11, 1973
September 21, 1976
November 28, 1980
August 25, 1987
July 16, 1990
July 17, 1998
March 24, 2000
October 9, 2007
Median:
5
69
6
0
0
20
30
40
69
89
0
116
22
49
15
63
18
26
56.2 %
4.0
0.0
0.0
3.6
7.8
4.6
13.1
14.8
0.0
31.4
11.8
5.6
5.7
20.1
1.7
5.7 %
The Taper
Caper
© 2015 The Leuthold Group
Fed QE taper begins
21.0
185
S&P 500 Consumer
Discretionary Total Return
Relative Strength
180
175
20.5
20.0
(right scale)
170
19.5
165
19.0
160
Russell 2000/
S&P 500
Total Return
Ratio
155
150
18.5
18.0
(right scale)
145
17.5
140
Taper ends
A
S O
N D 2014 M A
6
M J
J
A
S
O
N D
2015 M A
M
Transports’
weakness could
be an early
warning sign
61
60
S&P 500
2100
59
(right scale)
2050
58
2000
57
56
1950
55
1900
54
53
1850
52
51
1800
50
1750
49
48
1700
47
46
45
44
Dow Jones
Transports/Industrials
Relative Strength Ratio
1650
(left scale)
1600
© 2015 The Leuthold Group
2014
A M J J A S O N D 2015
7
A M J
Spreads sniffing
out trouble
2007:
Credit Leads Stocks
2.0
2014-15:
Credit Leads Stocks??
BofAML High Yield Spread (left scale - inverted)
2150
1600
3.0
2.4
2.8
3.2
1550
3.4
3.2
3.6
2100
2050
3.6
1500
4.0
4.4
1450
4.8
stock market peak (to date) on March 2nd
credit peak on
June 23, 2014
3.8
S&P 500
4.0
(right scale)
1950
4.2
5.2
5.6
6.0
S&P 500
6.4
(right scale)
4.4
1400
1900
4.6
4.8
1850
1350
6.8
2000
5.0
7.2
5.2
7.6
1300
1800
5.4
8.0
BofAML High Yield
Option-Adjusted Spread
5.6
8.4
5.8
1250
8.8
© 2015 The Leuthold Group
Nov Dec 2007
Mar Apr May Jun Jul
1750
(left scale - inverted)
© 2015 The Leuthold Group
Aug Sep Oct Nov Dec 2008
014
Mar Apr May Ju
8
Mar Apr May Jun Jul
Aug Sep Oct
Nov Dec 2015
Mar Apr May
The “hated”
bull market?
"Average" Sentiment Levels In 2014 Were The Second-Highest On Record
© 2015 The Leuthold Group
85
80
75
Investor's Intelligence
Bulls As A Percentage Of
Bulls Plus Bears
S&P 500
2600
2200
(Annual close - right scale)
1800
(Annual average - left scale)
2014
avg. =
76.3%
70
65
1400
1200
1000
800
600
400
60
55
200
50
45
61 1964 19671970
1970 1973 1976 1979
1991 1994 19972000
2000 2003 2006 2010
2009 2012 2015 A
1980 1982 1985 1988
1990
9
High Sentiment Years &
Subsequent Market Action
© 2015 The Leuthold Group
Ten Highest
Average
Sentiment
Years
1976
2014
1965
1964
1983
2013
1972
1971
2004
1986
Average
Sentiment
Reading
83.7 %
76.3
75.6
75.0
72.3
71.0
70.8
70.5
70.3
68.9
Average Return:
10
Subsequent
Year Gain
Or Loss In
S&P 500
-11.5 %
?
-13.1
9.1
1.4
11.4
-17.4
15.6
3.0
2.0
0.1 %
Bull markets
have
frequently
topped near
current
valuations…
Date Of S&P 500
Bull Market Peak
S&P 500
Normalized
P/E At Bull
Market Peak
December 31, 1961
22.3 x
February 28, 1966
23.0
November 29, 1968
20.6
January 31, 1973
20.8
September 29, 1976
13.6
November 29, 1980
11.3
August 31, 1987
22.3
July 31, 1990
18.4
July 31, 1998
27.7
March 31, 2000
32.1
October 31, 2007
20.9
April 29, 2011
20.5
Median At Modern Era Bull
Market Peaks (1957 To Date):
20.8 x
March 31, 2015
21.2 x
© 2015 The Leuthold Group
11
Even
forward P/E
ratios look
pricey…
Forward P/Es Now Far Above
Levels Seen At Last Bull Market Peak
18
18
Mar15 = 16.6x
17
16
16
Oct07 = 14.6x
15
17
15
14
14
MSCI World
P/E on 12-Mo.
Forward EPS
13
12
11
10
13
12
11
10
MSCI USA P/E on
12-Mo. Forward EPS
18
17
Feb15 = 17.3x
17
Oct07 = 15.4x
16
18
16
15
15
14
14
13
13
12
12
11
11
10
10
© 2015 The Leuthold Group
2003
2004
2005
2006
2007
2008
2009
2010
October 31, 2007
(month-end peak of 2002-2007
bull market)
12
2011
2012
2013
2014
2015
Stock market is
“broadly”
overvalued
"Median" S&P 500 Stock Pricier
Than At 2000 & 2007 Peaks
P/E on 12-Mo.
Trailing EPS
21.0x
28
26
24
22
20
18.8x
18
19.2x
S&P 500
Median Net
Profit Margin
March 2000
6.9%
October 2007
8.9%
March 2015
10.1%
16
14
12
10
© 2015 The Leuthold Group
1990
2000
Mar 2000
13
2010
Oct 2007
“Earnings are phenomenal!”
Oh, really?
150
120
100
80
150
120
100
80
Despite record-high profit margins and aggressive,
price-insensitive share buybacks, S&P 500 Reported EPS
remain about $30 below the level projected
by their 1937-2007 trend.
60
50
40
60
50
40
30
30
20
20
10
10
S&P 500
Trailing 12-Month
Reported EPS
(latest = $102.32)
© 2015 The Leuthold Group
1940
1950
1960
14
1970
1980
1990
2000
2010
Rest of world
looks cheaper;
Opportunity or
value trap?
40
Normalized P/E Ratios:
U.S. Vs. Rest Of World
35
30
MSCI USA Index
25
22.5x
20
17.0x
(World
Ex USA)
15
12.2x
(Emerging
Markets)
10
© 2015 The Leuthold Group
00
02
04
06
15
08
10
12
14
16
A pair of
bullish time
cycles are
coinciding…
The Stock Market's Annual & Presidential Cycles Combined:
S&P 500 Annualized Total Returns, 1926 To Date
Post-Election Year
Mid-Term Year
Pre-Election Year
Election Year
24.7%
Nov-Apr
12.9%
11.0%
Nov-Apr
9.4%
8.4%
Nov-Apr
May-Oct
5.8%
8.7%
May-Oct
Nov-Apr
May-Oct
1.1%
© 2015 The Leuthold Group
May-Oct
We are here.
16
More stock
market
numerology…
Dow Jones Industrials In
Statistically Favored Years (1898 To Date)
(DJIA Performance Figures Are Price Only)
© 2015 The Leuthold Group
Pre-Election
Years
1899
1903
1907
1911
1915
1919
1923
1927
1931
1935
1939
1943
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2015
Average:
9.2 %
-23.6
-37.7
0.4
81.7
30.5
-3.3
28.8
-52.7
38.1
-2.9
13.8
2.2
14.5
20.8
16.4
17.0
15.2
6.1
38.3
4.2
20.3
2.3
20.3
33.5
25.2
25.3
6.4
5.5
?
12.3 %
All Years
(1898 2014)
7.6 %
Years Ending
In "5"
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
2005
2015
Average:
17
38.2 %
81.7
30.0
38.1
26.6
20.8
10.9
38.3
27.7
33.5
-0.6
?
34.6 %
Pre-Election
Years Ending
In "5"
1915
1935
1955
1975
1995
2015
Average:
81.7 %
38.1
20.8
38.3
33.5
?
44.7 %
Years
Preceding A
Bush/Clinton
Election
1991
2015
2019
2023
Average:
20.3 %
?
?
?
20.3 %
Recessions
rarely
catch the
stock
market by
complete
surprise…
© 2015 The Leuthold Group
130
110
100
90
80
70
60
50
40
130
110
100
90
80
70
A Strong Stock
Market Suggests
Recession Risk
Is Minimal...
U.S. Industrial Production
(Arrows/vertical lines highlight
NBER business cycle peaks.)
60
50
40
30
30
20
20
10
10
12-Mo. Pct. Chg. In Real S&P 500
(Figures below show level in month of business cycle peak)
50
40
30
20
10
0
-10
-20
-30
-40
-50
Mar =
+12%
-6%
1940
-3%
1950
-9% -7%
-18% -26%
1960
1970
0% -3%
1980
-2%
1990
-26%
2000
Avg. at last
11 business
cycle peaks =
-9%
-1%
50
40
30
20
10
0
-10
-20
-30
-40
-50
2010
The year-over-year change in real stock prices has
been either flat or negative at all post-WWII
business cycle peaks. Near-term recession risk
looks very low on this basis.
18
Simple
economic
gauge
remains
bullish
2600
2000
1600
1200
S&P 500 Vs. ISM "Liquidity" Index
2600
2000
1600
1200
800
600
800
600
400
400
200
200
ISM Liquidity Index =
New Orders Index Minus Prices Paid Index
20
Percent
Of
Time
10 %
25
24
21
13
7
ISM Liquidity Index
Above 10
Between 0 And 10
Between -10 And 0
Between -20 And -10
Between -30 And -20
Below -30
S&P 500
Annl.
Returns
14.0 %
15.0
6.9
8.0
-1.3
-7.0
Analysis for February 1948 - October 2014 period.
Above +10 = maximum bullish for stocks
20
10
0
10
0
-10
-20
-10
-20
-30
-30
Below -30 = maximum bearish for stocks
-40
-40
© 2015 The Leuthold Group
1950
1960
1970
1980
19
1990
2000
2010
Commodities:
The problem
is supply.
Leuthold 3000
2.5
Energy Sector:
Capex/Depreciation
Ratio
2.0
1.5
1.0
Leuthold 3000
Materials Sector:
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
Capex/Depreciation
Ratio
© 2014 The Leuthold Group
1980
1990
2000
Both series are weighted medians.
20
2010
Oil’s
plunge in
perspective
Real Crude Oil Price
0.6
0.5
(Ratio, Monthly Avg. Crude Oil Price to
Consumer Price Index)
0.6
0.5
0.4
0.4
1973 (OPEC Embargo)To-Date
Median = 0.215
0.3
0.3
0.2
0.2
1946-To-Date Median =
0.133
0.1
0.1
© 2015 The Leuthold Group
1940 1950
1960
1970
21
1980
1990
2000
2010
Why “real”
oil prices
matter
0.70
0.65
0.60
75
Energy Stocks Track
Real Oil Prices
0.55
0.50
0.45
70
65
60
55
0.40
50
0.35
45
0.30
40
WTI Crude Oil
Deflated by CPI
(left scale)
0.25
35
30
0.20
25
S&P Energy
Sector Composite
Relative to S&P 500
(right scale)
0.15
20
0.10
15
© 2015 The Leuthold Group
1970
1980
1990
22
2000
2010
Energy:
Should you
catch the
falling
knife?
The "Cheapest Sector" Annual Strategy
1991-2014
S&P 500
Total
Return
30.5 %
7.6
10.1
1.3
37.6
23.0
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
2.1
16.0
32.4
13.7
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1991-2014 Annualized:
Total Return
Std. Deviation
Last Year's
Lowest P/E Sector
Financials
Financials
Financials
Financials
Financials
Financials
Utilities
Utilities
Materials
Utilities
Telecom Services
Energy
Utilities
Energy
Energy
Financials
Energy
Financials
Energy
Utilities
Utilities
Financials
Industrials
Financials
Energy
10.2 %
18.4 %
No. Yrs. Outperforming S&P 500:
Correlation With S&P 500 (Annual Returns):
Results assume annual rebalancing of S&P 500 sectors;
numbers include dividends, but exclude transactions costs.
© 2015 The Leuthold Group
23
Cheapest
Sector
Strategy
Total
Return
49.1 %
23.3
10.6
-3.5
54.1
35.2
24.7
14.8
25.3
57.2
-12.2
-11.1
26.3
31.5
31.4
19.2
34.4
-55.3
13.8
5.5
19.9
28.8
40.7
15.2
16.9 %
24.1 %
16/24
0.67
Long-term
leadership from
Technology?
95
65
90
60
85
S&P 500
Technology Sector
80
75
Relative Strength
70
65
(right scale)
55
50
45
40
60
55
35
50
30
45
25
40
35
20
30
AC
World
25
Technology
Relative to ACWI Index
20
(left scale)
© 2015 The Leuthold Group
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
24
15
Technology bubble?
Far from it…
S&P 500
Techology
Relative P/E on 5-Yr.
Normalized EPS
5.0
4.5
4.0
3.5
5.0
4.5
4.0
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
© 2015 The Leuthold Group
1990
2000
2010
5.0
5.0
4.5
S&P 500
Techology
Relative
Price/Cash Flow
4.0
3.5
3.0
2.5
4.5
4.0
3.5
3.0
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
© 2015 The Leuthold Group
1990
0.5
2000
25
2010
Apple in perspective
Companies To Have Reached A Four Percent
Weight In The S&P 500, 1990 To Date
(…and how long they were able to stay there)
5.0
5.0
5.0
5.0
4.5
4.51 month
4.5
4.5
4.0
4.0
4.0
4.0
3.5
3.5
3.5
3.5
3.0
3.0
3.0
3.0
2.5
2.5
2.5
2.5
15 months
Microsoft
1990
2000
© 2015 The Leuthold Group
12 months
12 months
above 4%
2010
2.0
General
1.5
Electric
1990
2.0
Cisco
Systems
Exxon
Mobil
2.0
1.5
1.0
1.0
1.0
1.0
0.5
0.5
0.5
0.5
0.0
0.0
0.0
0.0
2010
1990
2000
2010
26
1990
2000
2010
1 mo.
4.5
4.0
3.5
Apple
3.0
3%
2.5
2.0
2%
1.5
1.5
1990
5.0
5%
4%
2.0
1.5
2000
10 months
1.0
1%
0.5
0.0
0%
2000
2010
Asset allocation:
Beware of “bottom fishing”
T
O
T
A
L
18
R
E
T
U
R
N
10
(%)
A Simple, Single-Asset Annual Allocation Strategy:
Select From Among Seven Asset Classes Using
Last Year's Performance Rank, 1973-2014
© 2015 The Leuthold Group
16
Assets Included In Analysis:
S&P 500
Russell 2000
MSCI EAFE
NAREIT Composite
U.S. 10-Yr. Treasury Bonds
S&P/GS Commodity Index
Gold
14
12
8
6
S&P 500 = +10.3%/Yr.
4
2
in
g
tP
er
fo
rm
or
s
W
27
50
0
P
S&
A
ss
et
B
es
th
Si
x
h
Fi
ft
t
B
es
t
B
es
t
Fo
ur
th
B
es
t
rd
Th
i
rid
B
B
es
t(
Se
co
nd
B
es
tP
er
fo
rm
in
g
es
m
ai
d)
A
ss
et
0
Asset allocation:
Own last year’s
runner-up asset
class during the
following year…
2015
Bridesmaid
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
2012
2013
2014
2015
2014
Total Return
REITs (NAREIT Index)
27.1 %
S&P 500
13.7
10-Yr. U.S. Treasury Bonds
10.7
Russell 2000
4.9
Gold
-0.2
MSCI EAFE
-4.5
Commodities (GSCI)
-33.1
© 2015 The Leuthold Group
1973-2014, Annualized
Total Return
Std. Deviation
-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
2.1
16.0
32.4
13.7
Bridesmaid
Asset Class
Owned During
Year
Commodities
Gold
Commodities
Large Caps
REITs
Gold
EAFE
Small Caps
Large Caps
Govt. Bonds
REITs
REITs
REITs
Large Caps
Govt. Bonds
Commodities
Commodities
Large Caps
Govt. Bonds
REITs
REITs
Small Caps
Commodities
Small Caps
Commodities
Small Caps
EAFE
EAFE
REITs
Govt. Bonds
Gold
EAFE
EAFE
Gold
EAFE
Gold
Gold
REITs
REITs
Gold
EAFE
Large Caps
Large Caps
10.3
18.0
No. Years Matching Or Exceeding S&P 500:
Correlation With S&P 500 Annual Returns:
28
Bridesmaid
Strategy
(Own Previous
Year's Runner-Up
Asset Class)
Total Return
75.0 %
66.3
-17.2
23.8
19.1
37.0
6.2
38.6
-4.9
39.3
25.5
14.8
5.9
18.5
-2.2
27.9
38.3
-3.2
18.8
12.2
18.5
-1.8
20.3
16.5
-14.1
-2.5
27.4
-14.0
15.5
15.4
20.9
20.7
14.0
22.5
11.6
4.3
26.5
27.6
7.3
5.9
23.3
13.7
15.7 %
18.5
28/42
-0.10
“Bridesmaid” has
been a winning
sector strategy, too
2015
Bridesmaid
S&P 500 Sectors
Utilities
Health Care
Information Technology
Consumer Staples
Financials
Industrials
Consumer Discretionary
Materials
Telecom Services
Energy
S&P 500
© 2015 The Leuthold Group
2014
Total Return
29.0 %
25.3
20.1
16.0
15.2
9.8
9.7
6.9
3.0
-7.8
13.7 %
S&P 500
Total
Return
30.5 %
7.6
10.1
1.3
37.6
23.0
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
2.1
16.0
32.4
13.7
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1991-2014 Annualized:
Total Return
Std. Deviation
Bridesmaid
Sector (Last Year's
Second Best Sector)
Consumer Staples
Financials
Consumer Discretionary
Industrials
Health Care
Financials
Financials
Health Care
Telecom Services
Materials
Health Care
Consumer Discretionary
Materials
Materials
Utilities
Utilities
Energy
Materials
Health Care
Materials
Industrials
Consumer Staples
Consumer Discretionary
Health Care
Health Care
10.2 %
18.4 %
No. Yrs. Outperforming S&P 500:
Correlation With S&P 500 (Annual Returns):
Results assume annual rebalancing of S&P 500 sectors;
numbers include dividends, but exclude transactions costs.
29
S&P 500
Sector
Bridesmaid
Strategy
Total
Return
41.7 %
23.3
14.6
-2.4
58.0
35.2
48.2
43.9
19.1
-15.7
-11.9
-23.8
38.2
13.2
16.8
21.0
34.4
-45.7
19.7
22.2
-0.6
10.8
42.9
25.3
14.9 %
24.8 %
15/24
0.94