We have two ears, two eyes and one mouth, which according to the old aphorism means that we should listen and see about twice as much as we speak. Investors listen to this advice by resisting the urge to tell the market what to do and instead of listening, they will likely find the message optimistic – if hard to believe. The initial signal is the general resilience of the broad market, finding support last week where it needed to preserve the uptrend while absorbing the higher move in bond yields over the past month. .SPX 6M mountain S & P 500, 6 months But the message in the market that there is something more surprising for many, a higher sprint in the “early cycle” sector that usually reflects the economy recovering and accelerating. What the chart says Ned Davis Research always measures the early cycle composite and here it shows that since the October low market has been tracked the average historical path out of half a dozen non-recessionary bear markets. Did the “soft landing” happen six months ago, at least in market terms? Renaissance Macro Research founder Jeff deGraaf has said that the tape is back in an uptrend and said, “The most important thing is the characteristics of the rally. “I don’t know how that happened. We believe that.” The Leadership Profile may point to an elongated Fed and economic tightening cycle and suggest where bifurcated market investors should migrate. Steel and hotel stocks are tearing up, for example, and utility stocks and consumer staples are tripping. This all gives confidence. that the lows in October are important, although they do not give us confidence that the index is ready for quick gains and are not hindered by several months of long trading. Yes, the Treasury yield curve remains very inverted in the mode of pre- typical recession, the main goal of the Federal Reserve for interest rates again has been pushed out in time and distance, and valuations have never been very low (although they are in the “fair” zone excluding some of the largest stocks). Still, it would be difficult to write a textbook plot which is more likely to attract bulls than has been played since the fall: the classic October low before the election trigger an unusual term, in the last days. ultra-high inflation reading. High and low inflation has historically been the most constructive backdrop for stocks. A rally into the New Year that set some broad signals and rare and supportive momentum, followed by a February pullback sent seasonally that is routine in magnitude but succeeded in cooling off sentiment and skimming off some market froth. Meanwhile, the corporate credit market remains strong and the Volatility Index is undisturbed, as bondholders and option traders see no signs of stress or need to panic. What investor sentiment says Retail investors only briefly experienced a bright mood in January with a burst of optimism, with the American Association of Individual Investors survey last week returned to show twice as many bears as bulls. Outflows from equity funds have increased as money has been transferred to money market and high-grade bond funds. And here we see a reversal going into this week from the early-year hunt for equity exposure among members of the National Association of Active Investment Managers. This attitude is certainly understandable given the still cautious Fed, slippage in earnings forecasts and deep pockets of weakness in housing and manufacturing. But it also provides reassurance as proof that complacency does not outweigh caution. The fixation on Treasury yields as a determinant of what stocks “should” make some sense but is also probably overdone. True, the ramp in the 10-year from 3.4% on February 2 – the S&P 500’s high for the post-October rally – to above 4% last week was quick and jarring and brought many potential dangers. He envisions somewhat sticky inflation that could require the Fed to raise rates beyond the economy’s capacity to handle it. With the 10-year now at just under 4% and the Fed funds rate above 4.5%, the S&P 500 is now higher than it was nearly ten months ago, when the 10-year was at 3% and the Fed funds was less than 1%. The interaction between rates and stock and equity valuations is not as precise or fixed as conventional wisdom suggests. For all the encouraging actions that we can see, it is also not difficult to reject positive conclusions. For one thing, the stock market can easily misjudge the next macro turn and overcome reality in the short term. And the unorthodox character of this signature, high-amplitude economic cycle should leave the mind open to outcomes that deviate from the historical template. What the economic cycle says Leuthold Group notes that the main labor market measure in the Conference Board’s Consumer Confidence survey just made an unprecedented turnabout. At the end of July, the spread between those who said there was too much work and those who called jobs difficult was reduced by more than nine points from its peak. Since 1970, this has only happened during a recession or within six months of its onset. But since then, the scale has been more than nine points, “something that always confirmed the new economic expansion is underway,” said Leuthold Doug Ramsey. To repeat the question, what was last year’s “soft landing” (with a slight and rapid increase in the unemployment rate)? For Ramsey, this suggests the strength of today’s tight labor market may undermine the recent bull market calls he made by requiring the Fed to forcefully unwind. Another vector of frequent pushback to the market’s early cycle acceleration message is that we’ve seen very strong rallies that looked decisive, but ultimately collapsed in a long bear market. This has often happened when the Fed has or will soon finish tightening and the economy seems, for a short time, to come through in a decent shape. BCA’s research here shows a pleasing harmony in the current market trajectory and the post-tech bubble bear market of the early 2000s. It always pays to be aware of potential traps, of course. However, we can note that the S&P 500 has never previously spent a month above its 200-day moving average like this year. And the credit situation remains healthier during this period, the yield of triple-B rated companies spread over Treasuries never fell below two percentage points from early 2000 to 2003; it is now about 1.5 percentage points. The next wave of the crisis of the early 2000s also coincided with the 9/11 attacks and the accounting and fraud scandals of large companies from Enron, WorldCom and others that wiped out a large part of the income reported last year. Of course, things can be broken again in an insidious way. But today’s market messages contain no real clues, even if you listen carefully.