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

Is Warren Buffett doing some very significant selling? I think this might be the case. Leuthold Group three part series on deflation will be sent to clients in September and October. Also, the 10th Anniversary of 1987’s stock market peak: two important “then” and “now” comparisons.

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In August, a very high 38% of the trading days qualified as high volatility days.

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Ten largest S&P 500 stocks had latest four quarter earnings rise +19%, compared with top 25 companies +15%, top 100 companies +13% and bottom 200 companies +4%.

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Major Trend Index faded to High Neutral in August, but will likely be propelled back to Positive by strong September 2nd market…Valuations still off the charts, but new valuation era looks like it’s still with us.

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Margin debt was $116 billion in July, up from $80 billion a year ago. This marks a record high in terms of dollars, as a percent of GDP, and as a percentage of total stock market value.

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Doubtful, at this point. Relative performance “catch up” not conclusive...Abnormal downdraft in large caps a big contributing factor.

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In this year’s 147 trading days (through July 31) there have been 29 days with up moves of 1% or more. Four of those days were up over 2%.

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Technically, even after July’s move, the relative strength line is closer to breaking down (below 70) than it is to making a new high above the 1995 peak (above 80).

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While the long term implications of a capital gains tax cut might be bullish, I would expect the intermediate term impact to be negative.

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For July, our estimate is that $18 billion flowed into U.S. focus equity funds. This would be the largest monthly inflow since January 1997, and far more than last July’s depressed $3.7 billion.

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The balanced budget: politicians had to move fast because the budget looked as if it might balance itself without their help. Wage Inflation: our belief that it has been accelerating has been wrong, particularly in Q2.

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Cash no longer considered to be part of an equity portfolio...risk is considered to be the consequence of underperforming the S&P 500, not the impact of a bear market.

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Today’s great bull market has broken most past behavioral guidelines and precedents. It’s a different animal and could terminate as most manias do...with little forewarning and a waterfall decline.

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Market volatility 1997 to date well above 1992-1996 levels and also above median levels 1957 to present…characteristic of transition years and bear markets.

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Major Trend now Positive, with ratio of 1.16...Biggest bull market in history rolls on, pushing farther above past valuation extremes. Key client questions on stock market and Major Trend answered.

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The market mechanism is being increasingly overwhelmed by the sheer size and trading practices of today’s institutional players.

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In 1996, and so far in 1997, the broad based technology move has been breaking down. The relative strength line of the Technology Composite index tells the story.

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Goldilocks economy keeps rolling along, but earnings recovery has been nothing short of spectacular.

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There has been a declining trend in weekly inflows since early January. The strongest seasonal flows are in the first 3 1/2 months of a year (through April 15). 1997’s strongest inflows may now be history.

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The strong and broad May stock market moved the multi-factor Major Trend Index discipline up from Negative to Neutral status.

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