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

This move now appears to be a “second” leg, not an extraordinarily large bear market rally and not a new cyclical bull market.

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Back to the Basics? We think individual stock analysis is becoming increasingly important… Tax Simplification Coming Soon: The 1984 additions to the tax laws (over 1300 pages) may be the last straw… A Potential Shortage in Treasury Bonds: I know this sounds absurd. However, in the upcoming financing, the Treasury is for the first time offering a 20-year bond that is callable in five years.

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Hopefully clients read the late July Interim memos. Truthfully, the move is a tad more than expected. What now? The last calculation of the Major Trend Index produced a still negative but improved reading. A new reading will be available August 7. Just a huge rally or a new bull market? I think it’s the latter, but want confirmation from our Major Trend Index.

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Using Roll Call voting record statistics provided by the National Taxpayers Union, we previously examined the Senate. This issue, trends in the House are analyzed. Overall, fiscal responsibility is on the wane, especially with Democrats.

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Our weekly work comparing prices of 94 commodities with levels 12 months previous seems to function quite well as a stock market timing device and is also helpful at times with the bond market. At the end of July, it registered a “buy signal” for both. Take a look at this section and see how this has worked out 1973 to date.

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Ruminations from “The Road” – Recent visits and client lunches in New York, Philadelphia, Baltimore and earlier in San Francisco and Seattle have played an important part in what follows… Playing Interest Rate Politics – Polls were taken at our two June luncheons in New York to see what impact our guests thought a move in interest rates, prior to the November election, might have on the stock market.

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June was down in the middle and up at the end. The net was a 2.5% gain for the DJIA and 1.8% for the S&P 500. Not much, but a decided improvement over May. Actually, in the midst of the June churning, some significant undercurrents were occurring.

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It seems many of the financial department store builders may have lost touch with realities. Upscale financial product consumers, the most profitable market, are looking for expertise, not breadth.

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A stronger bond market does not necessarily mean a simultaneous rally in stock prices. The two markets did not move in tandem on the way down, and the stock market might well lag on the way up.

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Do You Know the Way to Monterey? Steve’s notes from the MTA seminar in Monterey, California…..Maybe the Best to be Said About May 1984 Is… It’s now history. It was a rotten month.

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The Major Trend Index shifted to Negative status as noted in the special May 22 Interim Memo. However, downside vulnerability appears quite limited. At any rate, expect a good market in the last half of 1984. It is too late in the decline for most to build cash, although some futures hedging may be appropriate for those who can.

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It seems that once all of Wall Street becomes aware of an indicator or historic market pattern, the damn things no longer seem to work. Is this now true of the Presidential election cycle? Well, don’t give up on this yet. According to Arthur Merrill’s research, the market so far in 1984 has been acting just like it is supposed to. The fireworks come in the last two quarters of the year.

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The Major Trend Index remains in “neutral,” but it appears the correction lows may have been seen around 1120, DJIA. Our “Early Warning” work remains constructive.

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The clock is ticking down, but we don’t know when the upside explosion will take place. It might even occur before the 1984 elections. Whatever, the investment rewards will be rich indeed. Should investors really run the risk of being out of the bond market? Really, the downside risk, considering the earning power of the coupons, is probably negligible. But the potential rewards are mouthwatering.

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The Major Trend Index remains in “neutral,” but it appears the correction lows may have been seen around 1120, DJIA. Our “Early Warning” work remains constructive.

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Our Major Trend Index is down to Neutral temporarily, but we think the market is now in final washout phase of the long complex correction dating back to late June 1983. Our guess at this time is the late February lows will hold.

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The mega merger mania may be about over. Our model scored big with Getty and now Gulf. We cashed in half of the 4% Gulf position at 69 on January 29 and have just sold the rest at 71. $80? Well maybe, but why be greedy? The party may be about over.

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The biggest financial burden may not be the skyrocketing costs of plants under construction. The eventual costs of decommissioning the now operating plants may be even greater.

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The February 23 memo advised clients of new tactical move into a package of major airlines, a 6 to 12-month tactical play. The sharp 23% decline in Airlines since Jan. 20 is viewed as a rare second opportunity to buy an industry in the midst of a profit surge at pre-recognition levels.

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Does it make sense to buy the traditional “defensive” stocks in the later stages of a bull market? If upside potential is viewed as only 20%-25%, it may not make much sense at all. However, we think risk can be reduced without giving up much potential reward.

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