Inside The Stock Market ...trends, cross-currents, and outlook

What might threaten Main Street equity confidence???

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Contrary to Wall Street wisdom, rising MZM is not necessarily indicative of Fed easing. Nor does contracting MZM mean a tightening Fed. Also, unlocking the mystery of the low U.S. savings rate.

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Back on sidelines again, Major Trend Index negative. Stage being set for a huge small cap market.

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The driving force behind today’s stock market is the public. Never before had they had such clout.

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We did not employ this tactical trading strategy in late 1998. Buying the beat up stocks late in the year and holding them into mid-February had been a consistent winning strategy...that is until the last four years.

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BROAD SECTOR PERCENTAGE BREAKDOWN BY 3000 STOCK UNIVERSE

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It’s no secret that the term “January Effect” has taken on a different meaning in recent years. Once a reference to the price bounce that underperforming small caps stocks receive as year end selling pressures dissipate, it has now been adopted by commentators to describe the unconstrained rally of large cap stocks, as the seasonal flood of cash pouring into big cap growth funds is invested

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Nine out of 19 trading days in January (47%) ended with close to close moves of at least 1% in the S&P 500.

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This has been the greatest bull market in history. Investors coming into the market in the last few years have garnered unbelievable returns. Over the last five years, the S&P 500 has compounded at an annual rate of 24.0%.

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Net inflows into U.S. focus equity funds were somewhat ahead of last year’s pace by the end of January. Estimated net inflows of $18 billion compares to last January’s $16.1 billion.

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In 1998, the S&P 500 on a close to close basis moved up 1% or more on 47 trading days and down 1% or more on 33 trading days. Combined, this represents almost 32% of the 252 trading days. In 1995, only 5.2% of the trading days experienced moves of 1% or more.

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As is typical, December was a weird month for the stock market, as year-end cross currents swirled. Market breadth, as measured by advance/decline studies, spurted late in December, but lagged for the month.

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This was a year where the super cap growth stocks, especially the tech stocks, blew away most active managers. Our Technology...Big Ten sector (10 largest caps) was up 75% for the year. The high P/E tier of the Royal Blue Index was up an unprecedented 57%.

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It certainly was an interesting year for mutual fund cash flows. In mid-1998, it became clear that investors were beginning to favor the relative safety of bond and money market funds over equity funds. Up to that point, equity funds had been getting the lion’s share of investors’ contributions.

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The following table compares the performance of the Russell 2000 Index (since its inception in 1979) with the S&P S00. Over this entire period, the Russell has outperformed the S&P in ten of the twenty years (S0% of the time), producing a slightly lower annual compound rate, 12.4%, versus 13.6% for the S&P 500.

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Thermal pollution time again: Steve’s 1999 predictions for the economy and his market outlook, including a look back at last year’s forecasts.

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Small cap fund flows improving, but well below 1997 and 1996 levels. Nearly 70% of November’s bond inflows of $5.5 billion were earmarked for High Yield funds.

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In our never-ending quest for valuation measures, we constructed a histogram which shows the number of S&P 500 units needed to purchase a new home.

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Depending on what the December 15th list looks like and providing that the overall market is not soaring we might participate, anticipating a January-February bounce.

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Volatility diminished in November after a very volatile month of October.

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