Market cycles don’t always unfold according to the familiar script, but they tend to trace similar story arcs.
And right now, the U.S. stock market is moving through plenty of the plot points associated with a gradual, tantalizing topping process.
This, at least, is the view of veteran market watcher Doug Ramsey, chief investment officer at the Minneapolis research and asset-management firm Leuthold Group.
During the past several months of range-bound trading in the vicinity of its all-time high above 2100, the Standard & Poor’s index has been increasingly reliant on a narrowing group of strong stocks and has largely masked significant beneath its calm surface.
“Over the last six months specifically,” Ramsey says in the attached video, “it’s been some of the usual characters that tend to tire out and start to lag late in a bull market.”
Ramsey notes, in particular, the widely discussed drop of more than 10% in the transportation sector and similar damage to utility stocks as typical features of a “distribution” process that can precede a more important peak in the broad indexes.
Meantime, the New York Stock Exchange Composite Index is down over the past 12 months. And earlier this week when the S&P 500 closed within a few points of its record high, there were still 299 new 52-week lows across the market, an elevated number of casualties under the circumstances.
Given all of these ragged conditions, “it’s hard to argue we can be in an inclusive bull market,” Ramsey says.
Of course, a less inclusive bull market isn’t necessarily one that is imminently doomed. Topping processes are complex and can unfold over a year or more, as the sturdy collection of favored stocks persist in their powerful uptrends.
Leuthold Group has long studied industry-group performance trends, as well as valuation and technical patterns, and of the 120 industry sectors it follows, seven of the 10 best performers in 2014 remain in the top ten so far in 2015. This shows the unusual persistence of the leadership in areas such as biotech.
Ramsey oversees the asset-allocation policy for his asset-management clients, and in recent weeks he cut the exposure to equities to 55%, from the “low-60s” in June. He is also co-manager of the Leuthold Core Investment fund (LCORX), a blend of equities, bonds and cash whose stock holdings at last report had sizable weightings in the leading sectors of healthcare, consumer cyclicals and technology.
Of course, not all the story lines leading to a major market setback are in synch. Ramsey says: “If I were as bull, a couple of things I’d be pointing to” include the decent strength in small and mid-sized stocks, and the “unusual strength in financial stocks.”
So he remains invested in stronger stocks, but on alert for further signs that this rather expensive stock market might be approaching a cyclical downturn of some significance. And he cautions that it’s unrealistic “to wait for all the boxes on the checklist to be filled” before anticipating a serious market pullback.
“If it were that easy,” he jokes, “we’d have the Big Four accounting firms managing all the assets in the country.”
More from Michael Santoli: