In the investment management business, we all have our influences.  And with so much economic and market strategy “content” readily available on the internet, it’s a double-edged sword: there is a lot to choose from, but it can also be dizzying.  But since we all have a large swath of the global markets to cover to make the most informed decisions possible, we have to make decisions about what and who to read regularly.  Otherwise, there just is not enough time in the day.

One firm whose work we have followed for a very long time is Leuthold Group.  Their monthly publication, Perception Express is also known as the “Green Book.”  It is typically at least 75 pages long, and covers many types of markets from a quantitative angle.  At Sungarden, we see Leuthold’s outstanding work as one important segment of our quantitative research (alongside the fundamental and technical work we do).

So, when Leuthold makes a major forecast, we pay close attention.  And in their January Green Book, they said they see the U.S. stock market beginning a “topping process” which started last July.  They believe that this will ultimately take U.S. stocks down by 25-30% in either 2015 or 2016.  Leuthold points to symptoms such as a weak high yield bond market, lagging relative performance of the NYSE Composite Index (which was the focus of our 11/28/14 blog), and very bullish newsletter writers.

The last one is particularly interesting, as it reflects the sentiments of the long-standing and perhaps misnamed Investors Intelligence Index.  You see, the more bullish newsletter writers are, the more likely the market’s next move is lower.  The opposite also tends to be true.  In particular, Leuthold points out that the high level of optimism in this survey was historically persistent last year.  That spells complacency, something that is more often a negative sign for the stock market.  In fact, Leuthold points out that sentiment years like 2014 have typically been followed by a period of years which included weak and very weak stock market returns.

We take analysis like this from Leuthold seriously, but innate to our hedged approach to investing is having a solid plan to defend whatever may come our way, and for whatever reason it occurs.

Next month, we plan to debut our own broad markets investment indicator.  The “Sungarden Investment Climate Indicator” will be a quick, weekly rating of market conditions.  Whether it is stormy, sunny or somewhere in between, we look forward to having a bottom-line assessment of the reward/risk tradeoff to investors at any point in time.  More on this in an upcoming blog.

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