There is no denying a very impressive rally in the S&P 500 over the past couple of weeks, but there is also no denying that things are not universally in good shape – that some of the underpinnings of a sustainable Bull market are showing signs of weakness. This letter presents some of the good and some of the bad in the stock market story.

We have been publishing this data to you for some time, but the format today is different (hopefully easier to read and quickly scan). We also added a few more indicators that help add depth and color to the market conditions.

• Overall US large-cap stock market is currently moderately Bullish, all indicators taken together
• Important fundamental indicators are mixed, but currently net positive
• Internal breadth indicators (how all the individual stocks in the indexes are doing) are negative and flashing caution
• Index price behavior is largely positive, flashing encouragement for stocks

Let’s look at these observations one at a time, with data.

We are using a 200 point conditions rating scale from minus 100 (strong Bearishness) to positive 100 (strong Bullishness), with zero in the middle for a neutral indication.

We rate the overall US large-cap stock market by these indicators at about positive 33 (moderately Bullish). The weights within the overall rating are:

•  60% Fundamentals
• 20% Internal Breadth
• 20% Price Chart Data.

The fundamental data has two main parts: intermarket Impact Factors, and Company Operations.

The Intermarket Impact Factors are primarily a set of interest rate data that drives the economy, profits and stock investment behavior in various ways – all translating in the end to changes in stock valuation levels. The data consists of Treasury yield curve data, junk bond spreads versus same duration Treasuries, and multi-factor financial market stress indexes from the St Louis Fed and the Cleveland Fed.

The Company Operations data consists of earnings growth, profit margins and sales growth – bedrock core fundamental data driving stock prices.

The weights within the Fundamental section are:

• 50% Intermarket Impact Factors
• 50% Company Operations.

The Intermarket section is rated positive 90 (very supportive of stocks), but the Company Operations are rated negative 10 (mildly Bearish).

When weighted equally, they give the Fundamental a rating of positive 40 (a Bullish rating) – but note the tug of war between largely interest rate factors supporting the market, and weak company operations weighing on the market. Note also that the Company operations are divided between not so hot reported data and optimistic 2016 estimates.

The Internal Breath Factors, with a 20% weight in the overall rating index, have a rolled up rating of negative 11 (mildly Bearish), in spite of some encouraging advances within the S&P 500 index.

Breath data suggests that a declining number of very large members of the S&P 500 are doing the heavy lifting, while a rising number of smaller members of the S&P 500 and the broader market are declining or sitting out the recent sharp stock market index rally — note: we have had a market-cap weighted index rally, not an across the board rally of most stocks.

The Internal Breadth Indicators look at 20 dimensions

For the S&P 500 versus the New York Stock Exchange Index:

• New Highs
• Net Advancing Issues
• Net Advancing Volume
• Issues with price > 200-day average
• Issues with Bullish Point & Figure charts

For the 1500 constituents of the S&P 1500 total market index:

• Direction of median price
• Direction of median flow of investments
• Direction of stocks within 2% of their 1-year highs
• Direction of stocks in a Correction or worse
• Direction of stocks in a Bear of worse
• % of stocks with 21-day positive flow of investments
• % of stocks in a Correction or Worse
• % of stocks in a Bear or worse

For equal-weight versus market-cap weight sisters for these indexes:

• S&P 500 large-caps
• Russell 200 very large-caps
• Russell 800 mid-caps
• Russell 2000 small-caps

The most negative data comes from the study of the individual stocks in the S&P 1500 total market index. For that data, we identified the weekly prices and volumes for each of the member companies for each week from the beginning of 2014 through this past Friday, and then plotted the data versus the percent by which the S&P 500 was off from its trailing 1-year high. You have not seen this data before, so we have supplied some of the graphs at the bottom of this letter for you to get a better feel for this part of the rating.

The Price Chart data has a 20% weight in the Overall rating. It paints a Bullish picture consistent with the ebullient TV moderators all last week, and consistent with the strong rally of the last couple of week; sporting a positive 55 rating .

The section consists of 12 data points, as follows:

Our 4 factor technical rating tool (combines trend line tip direction, price position vs trend line, money flow index, and parabolic stop and reverse indicator)

• S&P 500 large-caps
• Russell 2000 small-caps

Price over or under 40-week moving average

• S&P 500
• New York Stock Exchange Index

40-week average tip direction

• S&P 500
• New York Stocks Exchange Index

Short-term price direction and position in 1-year high/low range

• S&P 500
• S&P 1500
• Russell 2000

Most of these indicators cannot be used to predict or declare major tops or bottoms, but collectively they show the presence or development of forces that shape and move markets.

The Fundamental section does contain indicators known to predict or call tops or bottoms – namely the Treasury yield curve, reported corporate earnings and profit margin changes.

We have tested our 4 factor rating tool back as far as 1980, and it has done a pretty good job when using monthly data of calling tops and bottoms with a few false positives. It did not fail to give a signal, but has given some few signals that did not materialize (weekly and daily data for the tool are too noisy with many whipsaws).

We have recently cautiously added back some to equity exposure, but with more conservative funds and stocks, and still with above average cash.

S&P 1500 INTERNALS CHARTS:

Here are some of the S&P 1500 Internal Breadth charts we developed for this rating approach. We think they cast a shadow on the sharp rise of the market-cap weighted indexes

Each chart plots the distance of the S&P 500 from its trailing 1-year high in orange (right scale).

In this first chart the gray line (left scale) plots the median distance off its trailing 1-year high price for each stock among the 1500 stocks in the S&P 1500 index; and the dashed black line is the 13-week average of the median for the median stock.

You can see that the moving average of the median began to decline in early January and continued to and through the recent S&P 500 Correction. There has been some recovery of the weekly median stock along with the S&P 500 rally, but the median is still down from a pre-Correction level of negative 6-8% to a current level of negative 14-16%. That is not supportive of the stock market as a whole.

This chart plots the percent of stocks in the S&P 1500 that are within 2% of their 1-year trailing high (left scale) in the gray line. That also began declining in early 2015 from the high teens to less than 10% now. That is not supportive of the market as a whole.

The gray line (left scale) of this chart plots the percentage of S&P 1500 stocks that are in a 10+% Correction or worse. That percent began a clear rise in April and May from around 40% to 60+% now. That is not supportive of the market as a whole.

The percentage of S&P 1500 stocks in a 20+% Bear market, shown in gray (using left scale) did not provide any advance warning, but it has risen from around 20% in June to near 40% now – also not supportive of the market as a whole.

This chart plots the percentage of S&P 1500 constituents that have a 21-day moving average positive flow of investments (left scale), along with the 13-week average of that measure. The 13-week average has declined for most of the year, beginning around 60% to the current level of around 40%. On the other hand, the weekly 21-day investment flow responded strongly favorably to the rally in the S&P 500. This measure needs a little more time to tell its story. You can see that it is a very volatile measure, that makes the 13-week average a more useful guide.