Global Market Outlook – Opportunities and Risks...2017/11/24 · NED DAVIS RESEARCH GROP Please...

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Global Market Outlook – Opportunities and Risks

November 2017

TIM HAYES, CMTChief Global Investment Strategist

NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report.

Secular and Cyclical Trends 1-4

Breadth 5

Sentiment 6-7

Bond Yields 8-10

Risk-On/Risk-Off 11-12

Watch Reports 13

Valuation and Earnings 14-17

Regions 18

Dollar and Gold 19-20

Macro Influences 21-22

Flows 23-24

Bottom Line 25

Allocation and Models 26-30

Global Focus 31-36

TABLE OF CONTENTS

NED DAVIS RESEARCH GROUP 1Please see important disclosures at the end of this report.

Secular bull market in stocks, secular turning point in bonds?

© Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

S0202I

Asset Classes & Secular Trends Monthly Data 1900-01-31 to 2017-10-31 (Log Scale)


S0202I

Asset Classes & Secular Trends Monthly Data 1900-01-31 to 2017-10-31 (Log Scale)

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

25

10183256

100178316562

1,0001,7783,162

25

10183256

100178316562

1,0001,7783,162

S&P 500 Monthly Average Price Index (2017-10-31 = 2557) Source: S&P Dow Jones Indices

Per Annum Returns:

BULL BULL BULL BULL BULLBEAR BEAR BEAR BEAR

7.6% 21.2% 11.0% 16.0% 15.0%-2.6% -10.2% 1.0% -6.1%

S&P 500 Gain/AnnumDuring Secular Trends

GPA %Time

Secular Bull 13.8 54.1

Secular Bear -4.0 45.7

2.5

5.0

7.5

10.0

12.5

15.0

2.5

5.0

7.5

10.0

12.5

15.0

Sources: Prior to 1919 - A History of Interest Rates by Sidney Homer & Richard Sylla (Annual Average) From 1919 to Present - Federal Reserve (Annual Close)

Yields of Long-Term Government Bonds(2017-10-31 = 2.6)

BULL BULLBEAR BEAR

Long-Term Gov't Bond YieldsDuring Secular Trends

GPA %Time

Secular Bull -4.7 48.4

Secular Bear 4.2 51.6

2.7% 5.0%-4.9% -4.6%Per Annum Change in Yields:

100

178

316

562

1,000

1,778

100

178

316

562

1,000

1,778

*Constructed using prices by George F. Warren & Frank A. Pearson, Bureau of Labor Statistics, Commodity Research Bureau(www.crbtrader.com)

BULL BULL BULL BULL

NDR Commodity IndexDuring Secular Trends

GPA %Time

Secular Bull 8.4 53.4

Secular Bear -4.4 41.0

BEAR BEAR BEAR-7.4% -3.2% -3.1%5.4% 7.8% 10.6% 11.4%

NDR Commodity Composite*(2017-10-31 = 1092)

SIMILAR TO TODAY



S0202A

DJIA Secular Bull Market Comparison


S0202A

DJIA Secular Bull Market Comparison

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

79100126158200251316398501

79100126158200251316398501

-18.6%64.9% 344.5%

Secular Bull Ended in 1929

Secular Bull Starting in 1921

100112126141158178200224251282

100112126141158178200224251282


-23.2% -16.3%128.7% 18.4%

1951


1,000

1,259

1,585

1,995

2,512

3,162

3,981

1,000

1,259

1,585

1,995

2,512

3,162

3,981


-15.6% -36.1% -21.2%65.7% 150.6% 72.5%

1992


7,943

10,000

12,589

15,849

19,953

25,119

7,943

10,000

12,589

15,849

19,953

25,119

-16.8% -14.5%95.7% 71.9% 49.6%

2017-11-10


Shaded areas represent NDR-defined cyclical bear markets

Source: S&P Dow Jones Indices

Cyclical bull should continue into 2018.

MEDIANS IN SECULAR BULLS

CYCLICAL BULLS: 77%, 2.4 YEARSCYCLICAL BEARS: -19%, 8 MONTHS



ICS_31_ACWI

All Country World Index One-Year Cycle (2017) Daily Data 2017-01-02 to 2017-12-29 (Log Scale)


ICS_31_ACWI

All Country World Index One-Year Cycle (2017) Daily Data 2017-01-02 to 2017-12-29 (Log Scale)

31Jan '17

09 18 27Feb '17

07 16 27Mar '17

08 17 28Apr '17

06 17 26May '17

05 16 25Jun '17

05 14 23Jul '17

04 13 24Aug '17

02 11 22 31Sep '17

11 20 29Oct '17

10 19 30Nov '17

08 17 28Dec '17

07 18 27

118

117

116

115

114

113

112

111

110

109

108

107

106

105

104

103

102

101

100

99

106

105

104

103

102

101

100

2017 One-Year Cycle (Scale Right)MSCI All Country World Index Index (Scale Left)

Source: MSCITrend is More Important Than Level

Based on Daily Data from1987-12-31 to 2016-12-30


ICS_31_ACWI

All Country World Index Four-Year Cycle (2017) Daily Data 2017-01-02 to 2020-12-31 (Log Scale)


ICS_31_ACWI

All Country World Index Four-Year Cycle (2017) Daily Data 2017-01-02 to 2020-12-31 (Log Scale)

2017Jan Mar May Jul Sep Nov




2021Jan

118

117

116

115

114

113

112

111

110

109

108

107

106

105

104

103

102

101

100

99

132

130

128

125

122

120

118

115

112

110

108

105

102

100

98

2017 Four-Year Cycle (Scale Right)MSCI All Country World Index Index (Scale Left)

Source: MSCITrend is More Important Than Level

Based on Daily Data from1987-12-31 to 2016-12-30

Seasonal influence now bullish, more cyclical risk next year.


Maintaining overweight equity allocation – watching Global Balanced Account Model.


I4002

MSCI ACWI vs. NDR Equity Recommendation and GBAM Equity PercentageMonthly Data 2006-12-31 to 2017-10-31 (Log Scale)


I4002

MSCI ACWI vs. NDR Equity Recommendation and GBAM Equity PercentageMonthly Data 2006-12-31 to 2017-10-31 (Log Scale)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

224

251

282

316

355

398

447

501

562

224

251

282

316

355

398

447

501

562All Country World Index

Source: MSCI

3035404550556065707580

3035404550556065707580NDR Official Recommended Equity Allocation (%) (2017-10-31 = 65.0)

0102030405060708090

100

0102030405060708090

100NDR Global Balanced Account Model Equity Allocation (%) (2017-10-31 = 70.9)


Watch global breadth.

I138BI138B

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

100

158

251

398

100

158

251

398

0

20

40

60

80

0

20

40

60

80

0

20

40

60

80

0

20

40

60

80

Source:Source: MSCI

Moving average direction based on reversals of 0.5% or greater

Daily Data 1987-12-31 to 2017-11-10MSCI All Country World Index vs. 200-Day Moving Average Indicators

MSCI ACWI Performance

Middle Clip:Middle Clip: 1987-12-31 to 2017-11-10

% Above 200-Day Moving

Average is

% Gain/

Annum

% of

Time

Above 50.0 7.10 69.12

Below 50.0 3.68 30.88

Buy/Hold = 6.03% Gain/Annum


Bottom Clip:Bottom Clip: 1987-12-31 to 2017-11-10

% With Rising 200-Day

Moving Average is

% Gain/

Annum

% of

Time

Above 50.0 8.51 67.84

Below 50.0 1.00 32.16


MSCI ACWI (2017-11-10 = 575.66)

Percentage of 47 ACWI Markets Above 200-Day Moving Averages(2017-11-10 = 76.6%)

Percentage of 47 ACWI Markets With Rising 200-Day Moving Averages(2017-11-10 = 91.5%)


Watch sentiment.

I4121AI4121A

Jan

2013

Apr Jul Oct Jan

2014

Apr Jul Oct Jan

2015

Apr Jul Oct Jan

2016

Apr Jul Oct Jan

2017

Apr Jul Oct

105

110

115

120

126

132

138

145

151

158

166

174

105

110

115

120

126

132

138

145

151

158

166

174

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

Source:Source: Bloomberg Barclays Indices

Optimism

Pessimism Source:Source: Network Press, Inc

Daily Data 2012-11-13 to 2017-11-10Global Stock/Bond Ratio vs. DSI Global Sentiment Composite

Stock returns based on MSCI ACWI Total

Return Index. Bond returns based on Barclays

Global Long-Term Government Bond Total Return Index.

Daily Sentiment Index (DSI) Global Composite is an equal-weighted

sentiment composite based on the following markets:

S&P 500, NDX, Nikkei, FTSE 100, DAX, CAC 40, and Euro-Stoxx 50.

Global Stock/Bond Ratio Performance

Full History:Full History: 2012-11-13 to 2017-11-10

DSI Global Sentiment

Composite**

% Gain/

Annum

% of

Time

Above 70.0 0.93 27.87

40.0 - 70.0 7.88 52.99

Below 40.0 30.21* 19.14


* Cases less than one year are not annualized

Global Stock/Global Bond Total Return Ratio* (2017-11-10 = 175.86)

DSI Global Sentiment Composite** (2017-11-10 = 65.14)


Another round of volatility inevitable – how high will it rise?

I87I87

Jan

2015

Apr Jul Oct Jan

2016

Apr Jul Oct Jan

2017

Apr Jul Oct

1,202

1,259

1,318

1,380

1,445

1,514

1,585

1,660

1,738

1,202

1,259

1,318

1,380

1,445

1,514

1,585

1,660

1,738

10

15

20

25

30

35

40

10

15

20

25

30

35

40

-14.9-14.9

Source:Source: MSCI** MSCI ACWI price returns

Source:Source: Chicago Board Options Exchange, Incorporated. www.cboe.com

Daily Data 2014-12-23 to 2017-11-09Global Stocks vs. S&P 500 Volatility Index (VIX)

Bearish signals (vertical dashed lines) =

VIX crosses above 28.5 for the first

time in at least six consecutive months.

Shaded periods = maximum drawdown periods

for the 12 months following bearish signals.

Number of

Cases

Analysis

Start Date

Median

Drawdown

Median Drawdown Length

(Calendar Days)

Median Length to Drawdown

(Calendar Days)

6 1990-01-02 -22.0 118 53

Global Stock Price Index** (2017-11-09 = 1,771.34)

S&P 500 Volatility Index (VIX) (2017-11-10 = 11.3) (2017-11-09 = 10.50)

CHINA

BREXITOIL, BANKS TRUMP KOREA


VIX inversely correlated with equities and bond yields.


I87_CORR

One-Year Correlations- ACWI, VIX & 10-Year Treasury Yield Daily Data 1991-01-01 to 2017-11-10


I87_CORR

One-Year Correlations- ACWI, VIX & 10-Year Treasury Yield Daily Data 1991-01-01 to 2017-11-10

102030405060708090

102030405060708090S&P 500 Volatility Index (VIX) (2017-11-10 = 11.3) Source: Chicago Board Options Exchange, Incorporated. www.cboe.com

23456789

2345678910-Year Treasury Yield (2017-11-10 = 2.4%)

Source: Federal Reserve Board

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

Rolling One-Year Correlation: Daily % Change of VIX & MSCI ACWI 2017-11-10 = -0.67

Source: MSCI

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

-0.50

-0.25

0.00

0.25

0.50

-0.50

-0.25

0.00

0.25

0.50

Rolling One-Year Correlation: Daily % Change of VIX & 10-Year Treasury Yield 2017-11-10 = -0.23

Data Range (Years): 1 2 5 10 Max


Positive correlation between equities and yields.


I278

Global Stock/Bond Yield One-Year Correlation Daily Data 1983-06-24 to 2017-11-10 (Log Scale)


I278

Global Stock/Bond Yield One-Year Correlation Daily Data 1983-06-24 to 2017-11-10 (Log Scale)

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

158200251316398501631794

1,0001,2591,585

158200251316398501631794

1,0001,2591,585Global Stock Price Index*

*MSCI World Index price returns used prior to 1988, MSCI All Country World Index price returns used thereafter Source: MSCI

0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

8

9

Global Aggregate Bond Yield (2017-11-10 = 1.1%)Source: Barclays

-0.50

-0.25

0.00

0.25

0.50

0.75

-0.50

-0.25

0.00

0.25

0.50

0.75Rolling One-Year CorrelationDaily % Change of Global Stock Index & Global Bond Yield

(2017-11-10 = 0.30)

Stock Prices and Bond Yields Moving in Opposite Directions

Stock Prices and Bond Yields Moving in Same Direction


Financials sector correlations especially strong.


I6003

One-Year Correlations- ACWI , Bond Yields & Financials Relative StrengthDaily Data 1995-12-29 to 2017-11-10 (Log Scale)


I6003

One-Year Correlations- ACWI , Bond Yields & Financials Relative StrengthDaily Data 1995-12-29 to 2017-11-10 (Log Scale)

20

22

25

28

32

35

40

20

22

25

28

32

35

40ACWI Financials/ACWI

Source: MSCI

1

2

3

4

5

6

7

1

2

3

4

5

6

7Global Aggregate Bond Yield (2017-11-10 = 1.1%)

Source: Barclays

-0.25

0.00

0.25

0.50

0.75

-0.25

0.00

0.25

0.50

0.75Rolling One-Year Correlation: Daily % Change of ACWI Financials/ACWI & ACWI 2017-11-10 = 0.28

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-0.25

0.00

0.25

0.50

0.75

-0.25

0.00

0.25

0.50

0.75Rolling One-Year Correlation: Daily % Change of ACWI Financials/ACWI & Global Bond Yield 2017-11-10 = 0.60

Data Range (Years): 1 2 5 10 Max


Technology correlation strengthening, megacaps more dominant.


I2914

MSCI ACWI vs. Top 10 ACWI Stocks by Market Cap as a % of Total ACWI Market CapWeekly Data 1994-07-01 to 2017-11-10 (Log Scale)


I2914

MSCI ACWI vs. Top 10 ACWI Stocks by Market Cap as a % of Total ACWI Market CapWeekly Data 1994-07-01 to 2017-11-10 (Log Scale)

158

178

200

224

251

282

316

355

398

447

501

562

631

158

178

200

224

251

282

316

355

398

447

501

562

631MSCI ACWI

Source: MSCI

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

9

10

11

12

13

14

15

16

17

18

9

10

11

12

13

14

15

16

17

18Top 10 Stocks as % of ACWI Market Cap (2017-11-10 = 11.0)

Presentation FormatData Range (Years):1 2 3 5 10 20 Max

Top Number:10 20 40


ICS_28A.RPT

ACWI Information Technology Relative Strength Correlation to MSCI ACWIDaily Data 1995-12-29 to 2017-11-10 (Log Scale)


ICS_28A.RPT

ACWI Information Technology Relative Strength Correlation to MSCI ACWIDaily Data 1995-12-29 to 2017-11-10 (Log Scale)

0.14

0.16

0.19

0.22

0.260.29

0.32

0.35

0.39

0.420.46

0.49

0.53

0.570.61

AC

WI

Info

rma

tio

n T

ec

hn

olo

gy

/AC

WI

178

200

224

251

282

316

355

398

447

501

562

631

MS

CI A

CW

I

ACWI Information Technology/ACWI(scale left)MSCI ACWI (scale right)

Source: MSCI

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8Rolling 260-day correlation of daily returns between Information Technology/ACWI & ACWI(Local Currency)

Data Range (Years):1 2 5 10 Max

Moving Correlation (Days): 65 130 260 520


Watch Risk-On and Risk-Off proxies.


ICS_17OFF

Risk-Off Indices vs. ACWI Daily Data 2015-11-10 to 2017-11-10 (Log Scale)


ICS_17OFF

Risk-Off Indices vs. ACWI Daily Data 2015-11-10 to 2017-11-10 (Log Scale)

Dec2016

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2017

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

120123126129132135138141145

120123126129132135138141145Equal-Weighted Japanese Yen Index

50-Day Moving Average200-Day Moving Average

252-Day Correlation with MSCI ACWI = -0.46

Source: www.thomsonreuters.com

0.41

0.42

0.44

0.46

0.48

0.49

0.51

0.41

0.42

0.44

0.46

0.48

0.49

0.51

ACWI Consumer Staples/ACWI50-Day Moving Average200-Day Moving Average


Source: S&P Capital IQ and MSCI, Inc. (GICS)

0.240

0.248

0.256

0.264

0.272

0.280

0.288

0.240

0.248

0.256

0.264

0.272

0.280

0.288

ACWI Utilities/ACWI50-Day Moving Average200-Day Moving Average


Source: Commodity Systems, Inc. (CSI) www.csidata.com

0.1430.1500.1570.1650.1720.1790.1870.194

0.1430.1500.1570.1650.1720.1790.1870.194

ACWI Telecom/ACWI 50-Day Moving Average200-Day Moving Average


Source: MSCI


ICS_17ON

Risk-On Indices vs. ACWI Daily Data 2015-11-10 to 2017-11-10 (Log Scale)


ICS_17ON

Risk-On Indices vs. ACWI Daily Data 2015-11-10 to 2017-11-10 (Log Scale)

Dec2016

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2017

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

84

89

94

100

106

84

89

94

100

106Barclays High Yield Bond Price Index50-Day Moving Average200-Day Moving Average

252-Day Correlation with MSCI ACWI = 0.48

Source: Bloomberg Barclays Indices

0.32

0.35

0.39

0.42

0.46

0.32

0.35

0.39

0.42

0.46

NDR Large-Cap Cyclical/Consumer Index50-Day Moving Average200-Day Moving Average


Source: S&P Capital IQ and MSCI, Inc. (GICS)

0.16

0.18

0.19

0.21

0.22

0.24

0.26

0.16

0.18

0.19

0.21

0.22

0.24

0.26Copper/Gold Futures50-Day Moving Average200-Day Moving Average



2832354045505663

2832354045505663

Oil (WTI Spot Price)50-Day Moving Average200-Day Moving Average


Source: Bloomberg Finance L.P.


Also watch the “watch” reports.

IWATCHIWATCH

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

631

794

1,000

1,259

1,585

631

794

1,000

1,259

1,585

0

20

40

60

80

0

20

40

60

80

20

40

60

80

20

40

60

80

20

40

60

80

20

40

60

80

Source:Source: MSCI

Source:Source: Ned Davis Research, Inc.


Daily Data 2007-11-13 to 2017-11-10Watch Composites - Percentages of Bullish Indicators



NDR Watch Reports

% Gain/

Annum

% of

Time

All Bullish 17.16 14.00

Mixed 6.05 82.84

All Bearish -16.61 3.16



Chart View:Chart View: 2007-11-13 to 2017-11-10

NDR Watch Reports

% Gain/

Annum

% of

Time

All Bullish 14.23 21.37

Mixed 0.88 75.67

All Bearish -5.33* 2.96


* Cases less than one year are not annualized

MSCI ACWI (2017-11-10 = 1,766.61)

% of Rally Watch Indicators on Bullish Signals(2017-11-10 = 18.8%)

% of Top Watch Indicators on Bullish Signals (2017-11-10 = 77.8%)

% of Bear Watch Indicators on Bullish Signals(2017-11-10 = 90.0%)


Multiples have fallen as market has risen.


ITOP_F

Global Stocks vs. MSCI World Index Price/Earnings Ratio Daily Data 2014-11-13 to 2017-11-10 (Log Scale)


ITOP_F

Global Stocks vs. MSCI World Index Price/Earnings Ratio Daily Data 2014-11-13 to 2017-11-10 (Log Scale)

1,259

1,334

1,413

1,496

1,585

1,679

1,778

1,884

1,259

1,334

1,413

1,496

1,585

1,679

1,778

1,884Source: MSCI

Red dashed lines represent peaks followed by declines of 10% or more.

MSCI All Country World Index

17

18

19

20

21

22

23

17

18

19

20

21

22

23MSCI World Index P/E Ratio (2017-11-10 = 21.4)

P/E calculated daily using monthly reported earnings from MSCI.

Source: MSCI




-3

-2

-1

0

1

2

-3

-2

-1

0

1

2

MSCI World P/E Standard Deviations from 130-Day Mean (21-Day Smoothing) (2017-11-10 = -0.7)

Shading = signals six months beforepeaks to three months after.

Signals generated when indicator rises and staysabove 1.4 for 21 consecutive market days.

Presentation Format

Data Range (Years):1 2 3 5 10 20 30 Max

Arrows = Signal DatesSignals active for 130 trading days (six

months). Indicator must fall back below keylevel before a new signal can be generated.

AnalysisStart Date

Number ofCorrections

Number ofSignal Matches

SignalAccuracy (%)

Number ofSignals

Signal HitRate (%)

1970-08-27 19 13 68.4 30 43.3

Signal Accuracy = # of Matches/ # of Corrections Signal Hit Rate = # of Matches/ # of Signals


Earnings have been coming through …

S663S663

1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

2

10

32

100

316

1,000

2

10

32

100

316

1,000

-100

0

100

-100

0

100

-2

0

2

10

32

100

316

-2

0

2

10

32

100

316

Source:Source: Ned Davis Research, Inc., S&P Dow Jones Indices

Earnings Growth High

Earnings Growth Low Source:Source: Ned Davis Research, Inc.

Shaded Area Indicates Estimated Earnings Used

Trendline = 5.9 % Gain Per Annum

Source:Source: Ned Davis Research, Inc., Standard & Poor's

Monthly Data 1927-03-31 to 2018-06-30S&P 500 Index vs. GAAP Earnings Growth

DateDate4Q EPS 4Q EPS (3rd Clip)(3rd Clip)

Y/Y % ChangeY/Y % Change(2nd Clip)(2nd Clip)

06/30/2017 (A) $104.02 19.7

09/30/2017 (E) $107.02 20.1

12/31/2017 (E) $114.32 20.9

03/31/2018 (E) $117.41 17.1

06/30/2018 (E) $123.34 18.6

Average P/E at Earnings Peaks (Down Arrows) = 13.06 Average P/E at Earnings Troughs (Up Arrows) = 24.85

Based on Earnings Reversals of 10%

S&P 500 Index Performance


Y/Y Earnings Growth

(Latest Actual):

% Gain/

Annum

% of

Time

Above 20 2.47 23.02

Between 5 and 20 6.96 30.62

Between -20 and 5 12.08 38.09

-20 and Below -13.58 8.28


S&P 500 Index (2017-10-31 = 2575.26)

Average PE * 12-Month Earnings (2017-10-31 = 1840.74)

Y/Y S&P 500 GAAP Earnings Growth (2018-06-30 = 18.57%)

S&P 500 Earnings (Actuals Plus Estimates) (2018-06-30 = 123.34)

S&P 500 Earnings Trendline (2018-06-30 = 102.02)


… globally.


ICS_27A.RPT

MSCI All Country World Trailing Earnings and % of Companies with Positive Earnings RevisionsMonthly Data 2002-04-30 to 2018-10-31


ICS_27A.RPT

MSCI All Country World Trailing Earnings and % of Companies with Positive Earnings RevisionsMonthly Data 2002-04-30 to 2018-10-31

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

30%

33%

35%

38%

40%

43%

45%

48%

50%

52%

55%

58%

60%

62%

65%

68%

70%

73%

75%

78%

80%

82%

85%

88%

90%

92%

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

23.0

24.0

25.0

26.0

27.0

28.0

29.0

30.0Positive Revisions (%) Shifted Forward by 12 Months (2018-10-31 = 66.5%) (Left-Axis)MSCI All Country World Trailing 12-Month Earnings (2017-10-31 = 24.2) (Right-Axis)

Source: IBES and MSCI

Series based on USD inputs

Monthly 3/31/1982 - 10/31/2017 (Log Scale)

(I 139)

MSCI World Index Earnings

MSCI World Index Earnings Gain/Annum When:

Global Industrial Gain/ %Production Growth: Annum of Time* Above 3% 21. 7 30. 4

Between 0% and 3% 8. 0 43. 40% and Below -14. 9 26. 2

Source: MSCI14161922263136435059698195

14161922263136435059698195

World EarningsYear-to-Year % Change

10/31/2017 = 21.7%-45-30-15

0153045607590

-45-30-15

0153045607590

Composite Industrial ProductionYear-to-Year % Change

Moved Ahead Two Months

10/31/2017 = 3.21%

Countries Used For Industrial Production:U.S., Japan, Canada, U.K., Eurozone.

German Data Used Prior to 1999,Eurozone Data Used Thereafter.Source: Haver Analytics-15

-12-9-6-30369

-15-12

-9-6-30369

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

World Earnings vs. Industrial Production Growth

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at


Compare sector earnings growth and yields.

ACWI SECTORS MEDIAN EARNINGS YIELDS

Country/Region

Median Earnings Yield (%)

(Constituent Basis)

HistoricalMedian (%)

Distance from Historical Median

in Standard Deviations (Z-Score)

Real Estate 6.3 6.1 1.1

Financials 7.5 6.6 0.8

Information Technology 4.1 4.1 -0.0

Consumer Discretionary 5.1 5.2 -0.1

Industrials 4.6 5.0 -0.3

Materials 5.1 5.4 -0.3

Telecom Services 5.2 5.7 -0.3

Energy 3.5 5.8 -1.0

Health Care 3.2 4.1 -1.1

Consumer Staples 4.3 5.1 -1.1

Utilities 5.4 6.7 -1.7

Report Notes: Source: Ned Davis Research Inc. Cross-sectional median earnings yield calculated using MSCI constituent membership,Worldscope net income data, and Datastream market cap data in local currencies.

Ned Davis Research, Inc. ICS_38.RPT

SORTCHANGE IN ACWI SECTOR EARNINGS

Sector

1-Month % Change

in Earnings

12-Month % Change

in Earnings

1-Month Point

Change in Earnings

Yield

12-Month Point

Change in Earnings

Yield

Materials 0.1 99.4 -0.2 2.0

Information Technology 0.2 20.8 -0.3 -0.6

Industrials -0.7 17.6 -0.1 -0.2

Utilities -0.5 15.9 -0.2 0.2

Financials -0.7 15.0 -0.1 -0.7

Consumer Staples 0.1 10.9 0.0 0.2

Real Estate -0.7 9.2 -0.1 0.0

Consumer Discretionary -0.5 8.5 -0.1 -0.5

Telecommunication Services -0.6 6.7 0.1 0.3

Health Care -0.4 3.4 0.0 -0.5

Energy -1.8 -1132.5 -0.1 3.2

Report Notes: Earnings/yield based on trailing 12-Month earnings in USD. Source: MSCI

Ned Davis Research, Inc. ICS_33.RPT

SORT


We’re overweight EM; underweight Europe, Pacific, and Canada.


I178

MSCI Indices Relative to MSCI ACWI II Daily Data 2016-11-10 to 2017-11-10 (Log Scale)


I178

MSCI Indices Relative to MSCI ACWI II Daily Data 2016-11-10 to 2017-11-10 (Log Scale)

98

99

100

101

102

104

105

106

107

98

99

100

101

102

104

105

106

107Europe ex. U.K. RS 50-Day Moving Average 200-Day Moving Average

94

95

97

98

99

100

101

102

94

95

97

98

99

100

101

102Pacific ex. Japan RS 50-Day Moving Average 200-Day Moving Average

Nov '1614 23

Dec '1602 13 22

Jan '1702 11 20 31

Feb '1709 20

Mar '1701 10 21 30

Apr '1710 19 28

May '1709 18 29

Jun '1707 16 27

Jul '1706 17 26

Aug '1704 15 24

Sep '1704 13 22

Oct '1703 12 23

Nov '1701 10

93

95

98

100

102

105

107

93

95

98

100

102

105

107Emerging Markets RS 50-Day Moving Average 200-Day Moving Average

Source: MSCI


I177

MSCI Indices Relative to MSCI ACWI Daily Data 2016-11-10 to 2017-11-10 (Log Scale)


I177

MSCI Indices Relative to MSCI ACWI Daily Data 2016-11-10 to 2017-11-10 (Log Scale)

98.3

98.9

99.4

100.0

100.6

101.2

98.3

98.9

99.4

100.0

100.6

101.2United States RS 50-Day Moving Average 200-Day Moving Average

91

93

95

98

100

102

91

93

95

98

100

102United Kingdom RS 50-Day Moving Average 200-Day Moving Average

98

100

102

105

107

110

98

100

102

105

107

110Japan RS 50-Day Moving Average 200-Day Moving Average

Nov '1614 23

Dec '1602 13 22

Jan '1702 11 20 31

Feb '1709 20

Mar '1701 10 21 30

Apr '1710 19 28

May '1709 18 29

Jun '1707 16 27

Jul '1706 17 26

Aug '1704 15 24

Sep '1704 13 22

Oct '1703 12 23

Nov '1701 10

8991939598

100102

8991939598

100102Canada RS 50-Day Moving Average 200-Day Moving Average

Source: MSCI

MW

MW

MW

UW

OW

UW

UW


Consider yen impact on Japan, dollar on EM.


I390A

Correlation of Japan Relative Strength to USD/JPY Weekly Data 2012-12-28 to 2017-11-10 (Log Scale)


I390A

Correlation of Japan Relative Strength to USD/JPY Weekly Data 2012-12-28 to 2017-11-10 (Log Scale)






89

94

100

106

112

119

126

133

158

168

178

188

200

211

224MSCI Japan / MSCI ACWI (Scale Right)USD/JPY (Scale Left)

USD/JPY Rising = Dollar Strengthening vs. Yen Source: MSCI

-0.10.00.10.20.30.40.50.60.70.80.91.0

-0.10.00.10.20.30.40.50.60.70.80.91.013-Week Rolling Correlation Between Japan RS and USD/JPY (2017-11-10 = 0.49)

0.300.350.400.450.500.550.600.650.700.750.800.85

0.300.350.400.450.500.550.600.650.700.750.800.8552-Week Rolling Correlation Between Japan RS and USD/JPY (2017-11-10 = 0.58)

Weekly 1/03/1993 - 11/12/2017 (Log Scale)

(I 3165)

Dow Jones Emerging Markets Index/Dow Jones Developed Markets Index

11/12/2017 = 84.89

Emerging/Developed Gain/Annum When:

U.S. Dollar Index Gain/ %Y/Y Change: Annum of Time

Above 0 -4. 2 53. 4* Below 0 2. 8 46. 6

Source: Dow Jones Indexes434752586470788695

105116128142157

434752586470788695

105116128142157

U.S. Dollar Index 11/12/2017 = 94.39

Source: Bloomberg Finance L.P.747883889398

104110116123

747883889398

104110116123

Year-to-Year Change of Dollar Index 11/12/2017 = -4.7%Dollar Strong

Dollar WeakSource: Bloomberg Finance L.P.-15-10

-505

10152025

-15-10

-505

10152025

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Dow Jones Emerging Markets Index / Dow Jones Developed Markets Index vs. U.S. Dollar Momentum

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 20

After short-term reversals, dollar downtrend and gold uptrend intact.

I65I65

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

501

631

794

1,000

1,259

1,585

1,995

501

631

794

1,000

1,259

1,585

1,995

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

54.754.7

50.950.9

35.235.2

35.635.6

29.929.9

Source:Source: Commodity Systems, Inc. (CSI) www.csidata.com

Bullish Signal on 2017-01-03**Bullish Signal on 2017-01-03**Market Return Since Signal: 9.7%Market Return Since Signal: 9.7%

** London-based prices prior to 1970 due to fixed prices in the U.S.

Source:Source: Ned Davis Research, Inc.Bracket = 50Bracket = 50

Daily Data 2007-11-13 to 2017-11-10Maximum Rallies in Gold vs. Gold Watch Indicators

** Bullish Signal Expires on 2018-01-03 or** Bullish Signal Expires on 2018-01-03 orAfter a 10% Correction from the Signal Date,After a 10% Correction from the Signal Date,

Whichever Occurs First.Whichever Occurs First.

Bullish signals (vertical dashed lines) = % BullishIndicators first crosses above 50.

Repeat signals screened for 12 months.After screening period the % bullish must reverse above

the bracket from below to trigger a new signal.Shaded periods = largest rallies (>3%) during the 12 months following signals

(signal dates followed by corrections of 10% or more excluded)

Total CasesTotal Cases

(1969-08-01(1969-08-01

-2017-11-10)-2017-11-10)

Valid CasesValid Cases

(>3% Rally)(>3% Rally)

SignalSignal

Accuracy (%)Accuracy (%)

MedianMedian

RallyRally

Median RallyMedian Rally

LengthLength

(CalendarDays)(CalendarDays)

Median LengthMedian Length

to Rallyto Rally

(Calendar Days)(Calendar Days)

24 18 75.0 30.0 229 25

Gold Bullion Spot Price** (2017-11-10 = $1272.4)

Percentage of Bullish Gold Watch Indicators (2017-11-10 = 47.1%)


INF17_38A_C

U.S. Dollar Index, Gold Futures & Emerging Markets RS Daily Data 2016-11-10 to 2017-11-10 (Log Scale)


INF17_38A_C

U.S. Dollar Index, Gold Futures & Emerging Markets RS Daily Data 2016-11-10 to 2017-11-10 (Log Scale)

Nov '1614 23

Dec '1605 14 23

Jan '1705 17 26

Feb '1706 15 27

Mar '1708 17 28

Apr '1706 18 27

May '1708 17 26

Jun '1707 16 27

Jul '1707 18 27

Aug '1707 16 25

Sep '1706 15 26

Oct '1705 16 25

Nov '1703 12

92939495979899

100101102104105

92939495979899

100101102104105U.S. Dollar Index

50-Day Moving Average200-Day Moving Average

Source: Bloomberg Finance L.P.

1,148

1,175

1,202

1,230

1,259

1,288

1,318

1,349

1,380

1,148

1,175

1,202

1,230

1,259

1,288

1,318

1,349

1,380Gold Futures50-Day Moving Average200-Day Moving Average


9,333

9,550

9,772

10,000

10,233

10,471

10,715

9,333

9,550

9,772

10,000

10,233

10,471

10,715MSCI Emerging Markets/MSCI ACWI50-Day Moving Average200-Day Moving Average

Source: MSCI


Dropping real rates and reflation trend support gold.


AA032E

Asset Class Relative Strength II Monthly Data 1945-01-31 to 2017-10-31 (Log Scale)


AA032E

Asset Class Relative Strength II Monthly Data 1945-01-31 to 2017-10-31 (Log Scale)

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

0

1

2

5

10

18

32

56

100

0

1

2

5

10

18

32

56

100S&P 500 Total Return Index / S&P Long-Term Government Bond Total Return Index12-Month Moving Average

Source: S&P Dow Jones Indices & Standard & Poor's

0

1

2

5

10

18

32

56

100

0

1

2

5

10

18

32

56

100S&P 500 Total Return Index / NDR Commodities Composite*12-Month Moving Average

*Constructed using prices by Bureau of Labor Statistics and Commodity Research Bureau (www.crbtrader.com)Source: S&P Dow Jones Indices

0.1

0.3

0.5

0.6

0.9

1.1

1.4

0.1

0.3

0.5

0.6

0.9

1.1

1.4

S&P Long-Term Government Bond Total Return Index / NDR Commodities Composite*12-Month Moving Average

*Constructed using prices by Bureau of Labor Statistics and Commodity Research Bureau (www.crbtrader.com)Source: Standard & Poor's

REFLATION REFLATIONDEFLATION

INFLATIONDISINFLATION


Relative valuations support secular outlook for stocks, not bonds.


ICS_26C

Global Growth-Adjusted Relative Valuation Monthly Data 1997-01-31 to 2017-10-31


ICS_26C

Global Growth-Adjusted Relative Valuation Monthly Data 1997-01-31 to 2017-10-31

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-10123456789

10

-10123456789

10MSCI World Earnings Yield -- Solid Blue Line2017-10-31 = 4.69%

G7 Countries 10-Year Yield Composite** -- Dashed Red Line2017-10-31 = 1.65%

Sources: MSCI, Haver Analytics

** GDP-Weighted ($US terms) Composite of Canada, France,Germany, Italy, Japan, U.K. and U.S. 10-Year Government Yields

-6

-5

-4

-3

-2

-1

0

1

2

3

-6

-5

-4

-3

-2

-1

0

1

2

3

G7 Countries 12-Month Real GDP Growth Composite**2017-10-31 = 1.66%

** GDP-Weighted ($US terms) Composite of Y/Y % Changes of Canada,France, Germany, Italy, Japan, U.K. and U.S. Real GDP

-2.5

0.0

2.5

5.0

7.5

10.0

-2.5

0.0

2.5

5.0

7.5

10.0MSCI World vs. Growth-Adjusted Relative Valuation

Growth-AdjustedRelative Valuation

% Gain/Annum

% ofTime

* Above 2 8.27 69.04

Below 2 -3.90 30.96

MSCI World Earnings Yield Minus 10-Year Yield CompositePlus 12-Month Real GDP Growth Composite

2017-10-31 = 4.70%


Keep an eye on the flows.


I136D

Total U.S. and International Equity Fund Flows Weekly Data 2012-11-02 to 2017-11-03


I136D

Total U.S. and International Equity Fund Flows Weekly Data 2012-11-02 to 2017-11-03

-15

-10

-5

0

5

10

15

20

-15

-10

-5

0

5

10

15

20Total Equity Mutual Fund Flows (2017-11-03 = $-4.58 Billion)13-Week Moving Average (2017-11-03 = $-4.14 Billion)

Total Flow since 2012-11-02 = $-315.88B

-20

-10

0

10

20

30

40

-20

-10

0

10

20

30

40Total Equity ETF Flows (2017-11-03 = $3.66 Billion)13-Week Moving Average (2017-11-03 = $5.66 Billion)

Total Flow since 2012-11-02 = $1068.32B

Dec2013

Mar Jun Sep Dec2014

Mar Jun Sep Dec2015

Mar Jun Sep Dec2016

Mar Jun Sep Dec2017

Mar Jun Sep

-10

0

10

20

30

-10

0

10

20

30Total Equity Flows (2017-11-03 = $-0.92 Billion)

13-Week Moving Average (2017-11-03 = $1.52 Billion)Total Flow since 2012-11-02 = $752.44B

Date Range (years):1 2 3 5 Max

Sources: Investment Company Institute (www.ici.org)


I136E

Total U.S. and International Bond Fund Flows Weekly Data 2012-11-02 to 2017-11-03


I136E

Total U.S. and International Bond Fund Flows Weekly Data 2012-11-02 to 2017-11-03

-25-20-15-10

-505

10152025

-25-20-15-10

-505

10152025Total Bond Mutual Fund Flows (2017-11-03 = $7.67 Billion)


-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0Total Bond ETF Flows (2017-11-03 = $0.05 Billion)13-Week Moving Average (2017-11-03 = $2.06 Billion)

Total Flow since 2012-11-02 = $311.19B

Dec2013

Mar Jun Sep Dec2014

Mar Jun Sep Dec2015

Mar Jun Sep Dec2016

Mar Jun Sep Dec2017

Mar Jun Sep

-20

-10

0

10

20

-20

-10

0

10

20Total Bond Flows (2017-11-03 = $7.72 Billion)


Date Range (years):1 2 3 5 Max

Sources: Investment Company Institute (www.ici.org)

TAPER TANTRUM TIGHTENING TANTRUM???


Abnormal to normal, passive to active?


DAVIS247

Total U.S. Domestic Equity Fund Flows (Mutual Funds And ETFs) Weekly Data 2007-12-28 to 2017-11-03


DAVIS247

Total U.S. Domestic Equity Fund Flows (Mutual Funds And ETFs) Weekly Data 2007-12-28 to 2017-11-03

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-225

-200

-175

-150

-125

-100

-75

-50

-25

0

-225

-200

-175

-150

-125

-100

-75

-50

-25

0

Total U.S. Domestic Equity Mutual Fund Flows 52-Week Total (2017-11-03 = $-222.94 Billion)

Source: Investment Company Institute, www.ici.org

0

25

50

75

100

125

150

175

200

225

0

25

50

75

100

125

150

175

200

225Total U.S. Domestic Equity ETF Flows 52-Week Total (2017-11-03 = $227.45 Billion)


S0202H

Secular Trends Monthly Data 1994-01-31 to 2017-10-31


S0202H

Secular Trends Monthly Data 1994-01-31 to 2017-10-31

4

5

6

7

8

9

10

4

5

6

7

8

9

10BEARBULL

U.S. Unemployment Rate (2017-10-31 = 4.1%)

23 Year Mean = 5.9%

Source: Bureau of Labor Statistics

BULL

-0.50

-0.25

0.00

0.25

0.50

-0.50

-0.25

0.00

0.25

0.50

Rolling One-Year Correlation Between S&P 500& Long-Term U.S. Treasury Bond Total Returns

(Average Monthly Correlation Based on Daily % Changes) Source: S&P Dow Jones Indices , Bloomberg Barclays Indices

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

Stock Mutual Funds Monthly Net Inflows minusBond Mutual Funds Monthly Net Inflows

(12-Month Moving Average) Source: Investment Company Institute, www.ici.org

NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report.

� Cyclical bull market well intact…

� …within continuing secular bull market.

� But watch for increasing cyclical risk in 2018.

BOTTOM LINE

25


I4001AI4001A

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

100

126

158

200

100

126

158

200

20

40

60

20

40

60

20

40

20

40

0

10

20

0

10

20

Equity Benchmark Weight = 55% Source:Source: Ned Davis Research, Inc.

Bond Benchmark Weight = 35% Source:Source: Ned Davis Research, Inc.

Cash Benchmark Weight = 10% Source:Source: Ned Davis Research, Inc.

Daily Data 2005-07-29 to 2017-11-10NDR Global Stock/Bond/Cash Recommendations

Allocation recommendations follow I4000 prior

to 2008 and I04000 from 1/1/2008 to 6/4/2009.

For more details click here.click here.

Model vs. Benchmark Returns

Full History: 2005-07-29 - 2017-11-10

Equity Line Gain/Annum

Recommendations 6.7%

Benchmark 5.5%

Equity Line Based on NDR Global Recommendations (2017-11-10 = 221.31)

Benchmark Equity Line (55/35/10 Stocks/Bonds/Cash) (2017-11-10 = 193.78)

Recommended Equity % (2017-11-10 = 65%)

Recommended Bond % (2017-11-10 = 30%)

Recommended Cash % (2017-11-10 = 5%)

OW

UW

UW


I7000_RT_NDRI7000_RT_NDR

Jul Oct Jan

2016

Apr Jul Oct Jan

2017

Apr Jul Oct

100.0100.0

5050

0.00.0

0.00.0

0.00.0

00

0.00.0









Daily Data 2015-04-07 to 2017-11-09NDR Recommended Global Regional Equity Allocations

More Statistics

Benchmarks based on MSCI monthly cap

weightings smoothed by 12 months.

Official Recommendations vs. Benchmark Returns

Chart View: 2015-04-07 - 2017-11-09

Equity Line Gain/Annum

NDR Recommendations 9.0%

Benchmark 8.7%

Recommended Allocation (2017-11-09 = 124.93)

Benchmark Allocation (2017-11-09 = 124.15)

U.S. Recommended Allocation % (2017-11-09 = 55.0%)

Benchmark: MSCI U.S. Total Return (2017-11-09 = 53.0%)

Europe ex. U.K. Recommended Allocation %(2017-11-09 = 12.0%)

Benchmark: MSCI Europe ex. U.K. Total Return(2017-11-09 = 15.0%)

Emerging Markets Recommended Allocation % (2017-11-09 = 16.0%)

Benchmark: MSCI Emerging Markets Total Return (2017-11-09 = 11.2%)

Japan Recommended Allocation % (2017-11-09 = 8.0%)

Benchmark: MSCI Japan Total Return (2017-11-09 = 7.8%)

U.K. Recommended Allocation %(2017-11-09 = 6.0%)

Benchmark: MSCI U.K. Total Return (2017-11-09 = 5.9%)

Pacific ex. Japan Recommended Allocation %(2017-11-09 = 3.0%)

Benchmark: MSCI Pacific ex. Japan Total Return(2017-11-09 = 4.0%)

Canada Recommended Allocation % (2017-11-09 = 0.0%)

Benchmark: MSCI Canada Total Return (2017-11-09 = 3.2%)


EQU

ITIESO

CTO

BER 5, 2017G

LOBA

L FOCU

S

Please see important disclosures at the end of this report.

ww

w.ndr.com

| Periodical | Issue #INF17_36

1

Tim H

ayes, CM

T Chief G

lobal Investment Strategist

Anoop N

ath, CFA

Global A

nalyst

Ned D

avisResearch

Group

30 Years Later – A Better O

ctober

E-mail U

sB

OT

TO

M LIN

E

�

Current bullish outlook stands in contrast to O

ctober 1987.

�

Octobers of 1997 and 2007 also

compared.

�

We expect a better year-seven

October and fourth quarter

strength.

ALLO

CA

TIO

N SU

MM

AR

YFor m

ore details, see Current Positions.

OV

ERWEIG

HT

Stocks

Em

erging Markets

MA

RKETWEIG

HT

U

.K., U

.S., JapanUN

DERW

EIGH

T

Bonds, C

ash

Canada, Pacific ex. Japan, Europe ex. U.K.

REFERENCED

CHARTS

Thirty years ago at this time, the m

ar-ket w

as entering what w

ould turn out to be one of its w

orst months ever, thanks to

the DJIA’s w

orst day ever – the -23% crash

of October 19. As that m

onth progressed, w

e cut back exposure. On O

ctober 12, N

ed emphasized “risk avoidance.” O

n Oc-

tober 15, I described “Blood on the Street” (see page 2). The carnage had reached le-thal levels even before the arrival of Black M

onday four days later.

Fast forward 10 years to O

ctober 1997, and w

e find another negative month, this

time including the “m

ini-crash” of October

27. That -7% drop still stands as one of

the DJIA’s 14 biggest single-day declines,

more than half of w

hich have taken place in O

ctober. Fast forward again to O

ctober 2007, and w

e see a month in w

hich the m

arket eked out a small gain. But it also

included an October 9 peak that m

arked the start of the second m

ost severe bear m

arket in history – a DJIA

drop of 54%.

Even before the last three year-seven Oc-

tobers, stocks tended to struggle, drop-ping in seven of the eight O

ctobers from

1907 to 1977.

If all of this is leaving you ready to find the highest w

indow ledge nearby,

we w

ould keep other facts in mind. The

first is that based on the ACWI’s m

edian m

onthly return over the past 20 years, global equities have now

left behind three of the ACW

I’s four weakest m

onths (June, A

ugust, and September) and have en-

tered the first of the year’s three stron-gest m

onths. October, in fact, has been

the strongest month of all, up by a m

edian of 2.7%

. That’s also true of the DJIA

, as

the more recent date range indicates a

far better month than does the m

edian based on 117 years.

Rather than worrying about a repeat

of October 1987, 1997, or 2007, w

e have considered the im

proving seasonal influ-ence to be one of num

erous reasons for expecting a year-end rally. A

nother is the favorable global breadth. As show

n in the chart below

with O

ctober highlighted, our G

lobal Composite A

/D Line is enter-

ing October at new

highs and trending higher (bottom

clip). That was not the

case in 1987, 1997, and 2007, when it w

as trending low

er.

© Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior perm

ission. All Rights Reserved.See NDR Disclaim

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/copyright.html For data vendor disclaim

ers refer tow

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INF17_36A_C

NDR Global Composite Advance/Decline Line -- Years Ending in 7



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INF17_36A_C

NDR Global Composite Advance/Decline Line -- Years Ending in 7

Jan '1702

1120

31Feb '17

0920

Mar '17

0110

2130

Apr '1710

1928

May '17

0918

29Jun '17

0716

27Jul '17

0617

26Aug '17

0415

24Sep '17

0413

22Oct '17

0312

23Nov '17

0110

2130

Dec '1711

2029

50.050.150.250.350.450.550.650.750.8

50.050.150.250.350.450.550.650.750.8

1987

Source: S&P Dow Jones Indices

48.9

49.0

49.1

49.2

49.3

49.4

49.5

48.9

49.0

49.1

49.2

49.3

49.4

49.51997

48.048.148.248.348.448.548.648.7

48.048.148.248.348.448.548.648.7

2007

50.1

50.2

50.3

50.4

50.5

50.6

50.7

50.1

50.2

50.3

50.4

50.5

50.6

50.72017

2017-10-04 = 50.8



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2

To understand why the breadth w

as so much w

orse in the earlier years, let’s review

the market environm

ent and the indica-tors that reflected a challenging environm

ent for stocks in each of

three earlier year-sevens, starting with 1987. A

s we explained at

the time (below

), the breadth deterioration was not only evident

in the dropping A/D

Line, but also in the expansion of new low

s.



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3

As th

e market en

tered 1987, it re-

mained

in a secular bull that had

got-ten underw

ay five years earlier, driven b

y the nascent dow

ntrends of inflation

and interest rates. The disinflation trend raised econom

ic and earnings expecta-

tions to such an extent that the earnings yield dropped tow

ard 5% (right, top clip,

solid line). But then the inflation nemesis

returned, with com

modity prices trend

-ing higher and the U

.S. CPI jum

ping from

a low of 1.1%

to 4.4% b

y Octob

er. The three-year note yield gained tw

o percent-ag

e points over a six-m

onth span (m

o-

mentum

that h

as yet to be exceed

ed),

the Fed raised the discount rate, and the 10-year governm

ent bond yield reversed course and started heading back tow

ard doub

le digits (top clip, dashed line). In

contrast to today, equities and bond yields w

ere inversely correlated, and this meant

that the market w

as headed for trouble, especially w

ith the valuations reflecting com

placen

cy and

thus vuln

erability to

the risin

g rates. Th

e spread

betw

een

the bond

yield and

the earnings yield

exceeded

four percentage p

oints, the w

idest gap show

n in the chart.

The excessive optim

ism of 1987 w

as evident not only in the valuations, but also in the b

elief that advances in comp

uter technology could prevent portfolio losses. But as the m

arket declined, the “portfolio insurance” hedges failed to p

rovide any protection at all – the com

puters set off sell orders as equities breached their stop-loss order levels. W

hile real GD

P growth

held above 2.5%, that w

as not enough to offset the valuation extrem

e, as the spread betw

een the earnings yield and bond yield w

as even wider (right). W

ith economic ex-

pectations remaining positive, how

ever, the m

arket was able to recover once the

program

tradin

g h

ad d

one its d

amag

e an

d valu

ation

s had

return

ed to

mo

re historically norm

al levels. The chances of another crash have b

een reduced by the establishm

ent of circuit breakers, and both charts on this page paint a far m

ore favorable picture than they did in 1987. But the 1987 exp

erience is a remind

er that w

e should think contrarian w

hen th

e weig

ht of the valu

ation evid

ence

indicates a broadly exp

ensive market,

especially if accom

panied

by excessive

confidence in a pop

ular investment ve-

hicle (i.e., the ETF).



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ICS_26.RPT_US

MSCI U.S. Earnings Yield vs. 10-Year Governm

ent Bond YieldM

onthly Data 1969-12-31 to 2017-09-30



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ICS_26.RPT_US

MSCI U.S. Earnings Yield vs. 10-Year Governm

ent Bond YieldM

onthly Data 1969-12-31 to 2017-09-30

Earnings Yield Minus Governm

ent Bond Yield

19701975

19801985

19901995

20002005

20102015

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1710-Year Governm

ent Bond Yield 2017-09-30 = 2.33%Earnings Yield 2017-09-30 = 4.27%

Sources: MSCI & Haver Analytics

-4 -3 -2 -1 0 1 2 3 4 5

-4 -3 -2 -1 0 1 2 3 4 5



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ICS_26B.RPT

U.S. Growth-Adjusted Relative Valuation

Monthly Data 1969-12-31 to 2017-09-30



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ICS_26B.RPT

U.S. Growth-Adjusted Relative Valuation

Monthly Data 1969-12-31 to 2017-09-30

0.0 2.5 5.0 7.510.012.515.017.520.0

0.0 2.5 5.0 7.510.012.515.017.520.0

MSCI U.S. Earnings Yield -- Solid Blue Line

2017-09-30 = 4.27%U.S. 10-Year Governm

ent Bond Yield -- Dashed Red Line2017-09-30 = 2.20%

Sources: MSCI, Haver Analytics

-2.5 0.0 2.5 5.0 7.5

10.0

12.5

-2.5 0.0 2.5 5.0 7.5

10.0

12.5U.S. 12-M

onth Real GDP Growth

2017-09-30 = 2.21%

19701975

19801985

19901995

20002005

20102015

-2.5 0.0 2.5 5.0 7.5

10.0

12.5

15.0

17.5

20.0

-2.5 0.0 2.5 5.0 7.5

10.0

12.5

15.0

17.5

20.0M

SCI U.S. vs. Growth-Adjusted Relative Valuation

Growth-Adjusted

Relative Valuation%

Gain/Annum

% of

Time

* Above 2.99.11

49.38

Below 2.9

4.7550.63

MSCI U.S. Earnings Yield m

inus 10-Year Treasury Yield Composite

plus 12-Month Real GDP Grow

th2017-09-30 = 4.28%

Bracket Level:0 1 2 3 4 5 M

ean Median

Data Range (Years):1 2 3 5 10 20 M

ax Presentation Form

at



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4

By 1997, th

e secular b

ull h

ad

reached

the b

egin

nin

g o

f the en

d.

For both the S&P 500 and the A

CW

I, the cyclically-ad

justed real earn

ing

s yield

was reaching new

lows (right, top clip),

as was the dividend yield (bottom

clip). A

s the major benchm

arks had not expe-rienced m

ore than a 15% decline since

1990, retail investors were em

boldened to keep pouring m

oney into stocks, evi-dent in custom

er net inflows to equity

mutual funds. Yet earnings m

omentum

w

as slowing, and a flattening yield curve

warned of w

orse economic perform

ance to com

e (below). The advance had start-

ed to narrow, w

ith a shrinking number

of stocks pulling the market higher. A

nd signs of a b

readth peak had started to

app

ear, ranging from a high in the 10-

week A

dvance/Decline D

iffusion Index for U

.S. stocks to a peak in the percentage of m

arkets at one-year highs.

While the m

ini-crash was short-lived

and turned out to be a buying opportu-nity, it proved to be a w

arning shot across the bow

of a secular bull in its final stag-es. The 1998 cyclical bear follow

ed, from

which the glob

al bread

th would

never fully recover. A

nd by 1999, we w

ere able to identify 40 Signs of a Sentim

ent Peak, as the Technology bubble carried equities to their secular extrem

e. Today, valuations are generally better, especially relative to interest rates and on a grow

th-adjusted basis (see charts on Page 3), and earnings m

omentum

is strengthening. Whereas in

1997, the mutual fund inflow

s were an ex-

ample of the retail investor optim

ism to be

expected ahead of a secular market top,

today’s mutual fund outflow

s represent healthy skepticism

and buying potential. N

ow as then, a handful of m

egacaps ac-count for a rising share of global m

arket cap, but today’s breadth is b

etter. The b

road m

arket is particip

ating

on th

e upside along w

ith the dominant lead-

ers, not diverging from them

.



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S0202E S&P 500/ACWI Earnings Yield & Dividend Yield vs. Secular Trends

Quarterly Data 1925-12-31 to 2017-06-30 (Log Scale)



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S0202E S&P 500/ACWI Earnings Yield & Dividend Yield vs. Secular Trends

Quarterly Data 1925-12-31 to 2017-06-30 (Log Scale)

2 3 4 6 8 10 13 16 20 25

2 3 4 6 8 10 13 16 20 25BULL

BULLBULL

BULLBEAR

BEARBEAR

*Based on 10-Year Average Earnings Per Share (Inflation-Adjusted, U.S. Dollar)

S&P 500 Cyclically-Adjusted Real Earnings Yield*M

SCI ACWI Cyclically-Adjusted Real Earnings Yield*

19301940

19501960

19701980

19902000

20101.1 1.7 2.4 3.3 4.5 5.9 7.7

10.0

12.6

15.8

1.7

2.4

3.3

4.5

5.9

7.7

10.0

12.6

15.8S&P 500 Dividend YieldACW

I Dividend Yield

Source: Standard & Poor's & Haver Analytics

Percent GPA During Secular Bull Markets

DatesS&P 500

S&P 500 EYS&P 500 DY

04/28/1942 to 02/08/196610.8

-4.1-4.1

08/12/1982 to 01/13/200015.6

-10.0-8.9

03/09/2009 to 07/11/201714.4

-8.6-6.6

Percent GPA During Secular Bear Markets

DatesS&P 500

S&P 500 EYS&P 500 DY

09/03/1929 to 04/27/1942-10.1

10.58.7

02/09/1966 to 08/11/19821.3

7.84.3

01/14/2000 to 03/08/2009-5.6

12.612.5

Weekly 5/05/1985 - 10/01/2017 (Log Scale)

(I144)

10/01/2017 = 1511.5MSCI W

orld Index (Local Currency)MSCIW

orldIndexGain/AnnumW

hen:

Gain/%

YieldCurve:Annum

ofTime*Above0.4%

7.879.4

0.4%andBelow

0.420.6

CountriesIncludedinCompositeYieldCurve:U.S., Canada, U.K., Japan, Switzerland, and Eurozone

(German data used prior to 1999)Source: MSCI Inc.

199225255289328371421477541613694787892

10111146129814721668

199225255289328371421477541613694787892

10111146129814721668

Long-Term Rates Relatively High

Short-Term Rates Relatively High

10/01/2017 = 0.98%

-1.8-1.5-1.2-0.9-0.6-0.30.00.30.60.91.21.51.82.12.42.73.0

-1.8-1.5-1.2-0.9-0.6-0.30.00.30.60.91.21.51.82.12.42.73.0

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

2016

2017

MSCI World Index

Global Government Yield Curve Composite (10-Year Minus Three-Month) Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..

www.ndr.com/vendorinfo/. For data vendor disclaimers refer to

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5

A d

ecade later, g

lobal eq

uities w

ere in a secu

lar bear

market driven by deleverage and w

orries about mounting

deflationary pressures. Yet the stock market had been trending

higher, in a cyclical bull market from

October 9, 2002 to O

ctober 9, 2007. The bull had the second low

est annualized return of all 36 cyclical bulls since 1900 (14%

), and it was driven by ac-

comm

odative monetary policies that effectively transferred the

Tech bubble of 2000 to a housing and subprime bubble as the

decade progressed. By October 2007, the w

arnings of trouble ahead w

ere numerous. In fact, they had already b

ecome so

pronounced that our Global Balanced A

ccount Model had called

for cutting equity exposure (below). A

nd as shown on Page 6,

we had dropped our U

.S. exposure to underweight (our global

allocation was tied to the m

odel at that time). W

e reviewed our

2007 strategy in a subsequent report called “Exiting Equities in ‘07”, explaining that after w

hat is still the third longest cyclical bull m

arket on record, severe breadth divergences had been developing, and optim

ism had returned to excessive levels that

included a six-year high in U.S. consum

er confidence. Financial system

risk could be seen not only in the indicators that reflected subprim

e mortgage m

arket illiquity, but across the credit spec-trum

. Narrow

ing spreads warned of trouble ahead, as did a yield

curve that flattened ominously ahead of the econom

ic collapse to follow

(Page 4, bottom).

(I4000RT)

Monthly 3/31/1986 - 9/30/2017 (Log Scale)

GlobalBalancedAccountModel&BenchmarkGain/Annum*:

FullDateRange%GPA

RealTime%GPA

3/31/1986-7/31/2005-

EquityLine9/30/2017

9/30/2017Model

9.67.1

Benchmark7.2

5.4

Asof9/30/2017:Model(

)=1777.7

Benchmark()=

896.9

Model, Benchmarks, and weights changed on 10/31/2012. For more infoclick here.

115144181227284357447561704883

110713891742

115144181227284357447561704883

110713891742

Model Equity %9/30/2017 = 68.0%

Dashed Lines Indicate Benchmark Weights

15 30 45 60 75 90

15 30 45 60 75 90

Model Bond %9/30/2017 = 27.5%

Source: Ned Davis Research, Inc.15 30 45 60 75

15 30 45 60 75

Model Cash %9/30/2017 = 4.5%

5 10 15 20 25 30 35 40 45 50

5 10 15 20 25 30 35 40 45 50

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

2016

2017

NDR Global Balanced Account Model -- Real Time Since 7/31/2005

*Transaction Costs Not Included Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..

www.ndr.com/vendorinfo/. For data vendor disclaimers refer to

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NED

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6

The subsequent market dem

ise led to the undervalued con-ditions and other develop

ments describ

ed in our 2012 report,

A N

ew Era for A

llocation. The secular bull m

arket is well intact.

And

we d

on’t see the signs of speculation and

a worsening

macro environ

ment th

at set up th

e crash of 1987, th

e late-

secular bull conditions of 1997 that m

arked the beginning of

the end, or the echo-bub

ble conditions of 2007 that led to the

final downleg of the secular b

ear that had started in 2000. Our

strategy has not changed – let profits run.

In summ

ary, we don’t think it’s likely that O

ctober 2017 will be a repeat of w

hat happened in October 1987, O

ctober 1997, or O

ctober 2007, despite the tendency for year-seven Octobers to be the w

eakest months of the 10-year cycle based on D

JIA

data since 1917. Over the past 20 years, O

ctober has been the best month of the year, and Q

4 has been the best quarter. Global

breadth remains bullish, continuing to lead broadening econom

ic growth. A

nd earnings breadth has continued to improve,

holding in check the potential for multiple expansion. A

t 68%, the equity allocation recom

mended by our G

lobal Balanced A

ccount Model has risen, now

back in line with our recom

mended exposure. W

hile we w

ill be watching for signs of a riskier

environment in 2018, the current outlook rem

ains bullish

. We doubt the curse of year-seven O

ctobers will lead to blood on

the street this time.

(AA

501)

Daily 2/27/1998 - 10/03/2017 (Log Scale)

Equity Line Based on NDR Recomm

endations2/27/1998 - 10/03/2017 GPA = 7.05%Std. Dev. of 252-Day Returns = 8.80%

10/03/2017 = 380.4

Benchmark Equity Line (55/35/10 Stocks/Bonds/Cash)2/27/1998 - 10/03/2017 GPA = 6.92%Std. Dev. of 252-Day Returns = 8.61%

10/03/2017 = 371.2105123144169197231271317372436510

105123144169197231271317372436510

Recomm

ended Equity %10/03/2017 = 65.0%

Dashed Lines Indicate Benchmark W

eights30 40 50 60 70

30 40 50 60 70

Recomm

ended Bond %10/03/2017 = 30.0%

15 20 25 30 35 40 45 50 55

15 20 25 30 35 40 45 50 55

Recomm

ended Cash %10/03/2017 = 5.0%

Source: Ned Davis Research, Inc.0 5 10 15 20 25 30

0 5 10 15 20 25 30

MJ

SD1999

MJ

SD2000

MJ

SD2001

MJ

SD2002M

JS

D2003M

JS

D2004M

JS

D2005M

JS

D2006M

JS

D2007M

JS

D2008M

JS

D2009M

JS

D2010M

JS

D2011M

JS

D2012M

JS

D2013M

JS

D2014M

JS

D2015M

JS

D2016M

JS

D2017M

JS

NDR Stock/Bond/Cash Recomm

endations Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved..www.ndr.com/vendorinfo/

. For data vendor disclaimers refer to www.ndr.com/copyright.html

See NDR Disclaimer at

Ned DavisResearch

Group

Chief Global Investment Strategist

Timothy W. Hayes, CMT, is NDRG’s Chief Global Investment Strategist. He has been with the firm since 1986. Tim directs NDRG’s global asset allocation services, develops strategy and major investment themes, and establishes NDRG’s weightings for global asset allocation, presenting his views on the cyclical and secular outlook globally.

Tim’s recommendations, strategies, and timely market commentaries and studies are featured in Global Strategy publications, which focus on global allocation and the most significant global developments.

Tim has been featured many times on CNBC and Bloomberg TV, and his market views are often quoted in The Wall Street Journal and other financial media in the U.S. and internationally. He is author of The Research-Driven Investor, published in November 2000, and he has contributed to several other books. His research articles have appeared in the Journal of Technical Analysis, Technical Analysis of Stocks and Commodities, and other publications.

Tim received his Bachelor of Arts degree from Kenyon College, and he is a Chartered Market Technician. In 2008, the Investorside Research Association honored Tim with its Research Excellence Award for “Exiting Equities in ‘07.” In 1996, the Market Technicians Association awarded Tim the Charles H. Dow Award for groundbreaking research, recognizing an outstanding original work that best expounds on the principles of technical analysis.

TIMOTHY W. HAYES, CMT

[email protected]

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NDR uses and has historically used various methods to evaluate investments which may, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior NDR recommendations or NDR performance rankings, one should also consider that NDR may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse e� ect of transaction costs or management fees or re� ect actual investment results, that other less successful recommendations made by NDR are not included with these model performance reports, that some model results do not re� ect actual historical recommendations, and that investment models are necessarily constructed with the bene� t of hindsight. Unless speci� cally noted on a chart, report, or other device, all performance measures are purely hypothetical, and are the results of back-tested methodologies using data and analysis over time periods that pre-dated the creation of the analysis and do not re� ect tax consequences, execution, commissions, and other trading costs. For these and for many other reasons, the performance of NDR’s past recommendations and model results are not a guarantee of future results.

Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many di� culties and their e� ectiveness has signi� cant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the e� ectiveness of such devices. NDR believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider di� ering viewpoints and use a weight of the evidence approach that � ts their investment needs. Any particular piece of content or commentary may or may not be representative of the NDR House View, and may not align with any of the other content or commentary that is provided in the service. Performance measures on any chart or report are not intended to represent the performance of an investment account or portfolio, as some formulas or models may have superior or inferior results over di� ering time periods based upon macro-economic or investment market regimes. NDR generally provides a full history of a formula or model’s hypothetical performance, which often re� ects an “all in” investment of the represented market or security during “buy”, “bullish”, or similar recommendations. This approach is not indicative of the intended usage of the recommendation in a client’s portfolio, and for this reason NDR does not typically display returns as would be commonly stated when reporting portfolio performance. Clients seeking the usage of any NDR content in a simulated portfolio back-test should contact their account representative to discuss testing that NDR can perform using the client’s speci� c risk tolerances, fees, and other constraints.

NDR’s reports are not intended to be the primary basis for investment decisions and are not designed to meet the particular investment needs of any investor. The reports do not address the suitability of any particular investment for any particular investor. The reports do not address the tax consequences of securities, investments, or strategies, and investors should consult their tax advisors before making investment decisions. Investors should seek professional advice before making investment decisions. The reports are not an o� er or the solicitation of an o� er to buy or to sell a security.

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