27-December-98

We expected the stock market waters to muddy this month and muddy they did. Our short term trading model flashed sell signals on November 27 and December 7 followed by a violation of these signals (rendering them false) on December 21 for the S&P 500 index and NYSE Composite. The DJIA , which has yet to exceed its record high set on November 23, has thus far failed to violate the recent sell signals. All three indices are within five percent of their July 17 peaks so we are not yet prepared to declare this run from the October 8 lows the beginning of new BULL market.

Technically speaking, there is considerable weakness in this market since the July 17 peak. Both the advance-decline line and individual new 52 week highs are at pathetic levels. Looking at the SPDRs, both on-balance-volume and money flows have been deteriorating in the latest advance. The index of bullish minus bearish newsletter writers, off its recent high, is still at a negative +23.9. On the positive side, we are in the seasonal period where the so-called "Santa Claus Rally" tends to dominate. This rally historically encompasses the last five days of the year as well as the first two days of the following year. All told, it appears to us that the safest position at this juncture is to assume a NEUTRAL stance over the next month.

From an intermediate standpoint, we will declare an all out SELL if the S&P 500 closes below1193. On the flip side, a close above 1250 and new highs in the DJIA would signal that a resumption of the BULL market is in place. Check our intermediate model for confirmation if either should occur over the next month. Currently, we are fully invested in stocks after briefly pulling in our horns this past month following the November 27 sell signal.

With gold breaking below the $390 per ounce level, our bond model pulled a complete turnabout, flashing a BUY signal. In the current low inflation environment, a rising bond market is negative for stocks.

DJIA 9217.99	S&P500 1226.27
DJTA 3044.08	NASDAQ 2163.03
DJUA 314.54	30 YR BOND 5.21%

Stock Market Outlook: NEUTRAL

24-November-98

The DJIA, S&P 500 index, NYSE index, and the NASDAQ Composite are all at or near record highs, having completely retraced the bear market action that began with the July 17 high and culminated in a double bottom low on October 8. The recovery run from the lows was extremely rapid, exceeding 25 percent in the large cap averages and 45 percent in the technology heavy NASDAQ in just a smidgeon over six weeks!

The market has met the objective we established two months ago and now appears set for a pause. We have changed the signal in our short term model to NEUTRAL from BUY, locking in appreciable profits. Our model is very near an all out SELL signal, but the window for that occurrence will most likely close within a week if stock market volume continues to expand.

The index of bullish minus bearish newsletter writers, whiched reach a cycle low of -11 in September, rocketed to over 25 this past week. At the market peak in July this indicator stood very near that mark at 28. Sentiment in the options markets are equally bullish. As contrary indicators, these are transmitting a negative message about the near term outlook for stocks. In addition, the advance decline line is performing very badly, and the Russell 2000 index and DJTA are just as badly trailing the rest of the market. If that were not enough, most major market indices have traced out classic ascending diagonal triangles from their October lows. These rising wedge formations usually occur prior to a major change in market direction.

All that being said, we are not prepared to declare that a major "double top" bear market is in place until we see a bona fide SELL indication from both our short and intermediate model . At the moment it all seems just a tad too neat and clear to us. We fully expect that whatever is about to occur will be just as untidy and confusing as any other market pattern. Our advice to all market timers, traders, and nervous "buy and holders" is to keep a very close eye on our timing models over the next month.

Both the gold and bond markets are seeking direction right now. A reversal in stocks would more than likely be accompanied by lower bond yields in our current low inflation environment. Just to keep things interesting though, our (less than precise) bond model appears at this juncture to be within two weeks of triggering a SELL signal (leading to higher yields).

DJIA 9301.15	S&P500 1182.99
DJTA 3078.72	NASDAQ 1965.88
DJUA 311.07	30 YR BOND 5.22%

Stock Market Outlook: NEGATIVE

25-October-98

On October 8, the S&P 500 index made a successful retest of the September 1 low, closing at 959.4. This completes a classic "double bottom" formation from which stocks have staged an impressive rally. The S&P 500 is up 12%, the Dow 9%, the Nasdaq and Russel 2000 19% and 18%, respectively.

Our expectation remains as stated last month: "Our next objective is for the indices to make a retest within +/- 5% of the old highs. That means betweeen 1130 and 1250 for the S&P 500, and roughly 8800 to 9800 on the Dow Industrials. At that point, we will have to evaluate the situation to determine whether a new BULL market is in force or if the third and ugliest leg of a BEAR market is to follow."

The bond market seems to have put in a blow-off top this past month. The 30 year government bond dropped rapidly to 4.71% and now finds itself back to 5.16% where it was for our last letter. Recent weakness in gold probably means a retest of the recent bond price highs is in the cards. Our model is yet to flash a sell signal, but we believe a trend reversal is in place.

DJIA 8452.29	S&P500 1070.67
DJTA 2777.01	NASDAQ 1693.86
DJUA 301.45	30 YR BOND 5.16%

Stock Market Outlook: POSITIVE

23-September-98

The S&P 500 index made an intraday cycle low on September 1 at 940.0 and a closing low on August 31 at 957.5. The total correction from the July 20 peak is 21 percent intraday, and 19 percent based on closing prices. Since it hit bottom, the index has recouped just over half of its losses.

Thus far the scenario has unfolded precisely as we had suggested in last months letter. We declared that the market was in a BEAR market, meaning the market must fall more than 20 percent. While the large cap indices (Dow, S&P 500) have not as yet convincingly exceeded that mark, the NASDAQ, Dow Transports, and Russel 2000 sold off 27, 30, and 32 percent, respectively.

As we had anticipated, the market low was achieved in the first week of September. Our short term model recommended a move into 100% stocks on September 1 and 200% stocks (purchased on margin) on September 8.

Our next objective is for the indices to make a retest within +/- 5% of the old highs. That means betweeen 1130 and 1250 for the S&P 500, and roughly 8800 to 9800 on the Dow Industrials. At that point, we will have to evaluate the situation to determine whether a new BULL market is in force or if the third and ugliest leg of a BEAR market is to follow.

We pointed out last month four reasons why the latter scenario seems more likely. We now add to that a fifth reason. In spite of President Clinton's rebound in the polls this week following the public viewing of his videotaped Grand Jury testimony, there are strong parallels between his predicament and Richard Nixon's watergate scandal in 1974. Support within his own party is thinning, loyal confidants are depleted, the Press is more negative toward the President than the public at large, and both parties in Congress are showing signs of moving from partisanship to statesmanship.

The relevance of all this is that the Watergate scandal deepened the BEAR market triggered by the Arab oil embargo. It is becoming more and more likely that the Clinton scandal will do the same for the recent downturn triggered by the Asian crisis.

DJIA 8154.41	S&P500 1066.09
DJTA 2904.1	NASDAQ 1760.27
DJUA 302.98	30 YR BOND 5.16%

Stock Market Outlook: POSITIVE

29-August-98

This past month was a watershed for the stock and bond markets. As gold weakened, a BUY signal was triggered in our bond model in the first week of August. Long term treasury yields immediately tumbled from the 5.70% level to below 5.40%. At the same time, the S&P 500 index broke down through the 1120 level, clearly signalling the beginning of a BEAR market in stocks. Although our intermediate model has not yet flashed a SELL signal, our regular readers have been preparing for the likelihood of a summer BEAR market since our March 22 issue of this newsletter (see below).

For most of this year, the stock and bond markets have fluctuated more or less independently of each other. This decoupling between the two markets raised the possibility that the U.S. economy was transitioning from inflation to "zero-inflation". As August unfolded, it became clear to us that these markets have now completely inverted. Prior to the decoupling, a rising bond market (falling interest rates) was followed by a rising stock market. This month we find the two markets actually moving in opposite directions.

We began alerting our readers to the likelihood of an inverted relationship occuring between stocks and bonds as far back as November of 1997. What caught us by surprise, however, is that all this occured with CPI inflation running at 1.7 percent annually. As we pointed out in our article Goldilocks Meets the Bear , this phenomenon has historically occurred with inflation between -1.1 and +1.1 percent.

Our take on all of this is that analysts have already discounted a "zero-inflation" economy. There are DEFLATIONARY signs all around us, and not just in the deflation inspired crises of Asia, Russia, and Latin America. In this country, falling long term bond yields as well as 20 year lows in gold and the CRB (Commodity Research Bureau) index point to a strong likelihood that CPI inflation will approach zero in the near future. Incidentally, the GDP (gross domestic product) implicit price deflator, at around 1.0 percent, is already in the "zero-inflation" range.

So, what's next? The Large Cap indices are down nearly 15 percent off their all-time highs of last month. We are currently in the 3rd wave of the correction (down-up-down) which is likely to reach bottom over the next two weeks somewhere between 935 and 1020 on the S&P 500 index, 7300 and 8000 on the Dow. We suggest you monitor our short term model to help you decide when that point has been reached. If we exceed 20 percent on the downside, it may well be that the entire bear market will have been completed. Then it will be off to the races once again with new market highs a certainty before year end.

There are, however, good reasons to believe that a more negative scenario awaits. We conjecture it might unfold as follows: a market bottom perhaps the first week in September. This would be followed by a retest of the old highs where the Large Cap indices retrace within +/- 5% of their previous highwater marks. Finally, a deeper and more violent leg down that would sink the major averages 30 to 40 percent off their highs of the year.

We count four reasons for favoring a more negative outcome: 1) the 3.5 to 4 year business cycle peak is due this year which typically brings a more significant correction with it; 2) our intermediate stock market timing model is close to triggering a SELL signal, which could coincide neatly with a market retest of the old highs; 3) the index of bullish minus bearish newsletter writers never reached the levels of euphoria we had expected to see before a bear market ensued - a push toward new highs would almost guarantee levels over 40; 4) the 60 year cycle suggests we are at the point where a bear market substantial enough to show up on the yearly average chart is due.

As for bonds, the secular trend is positive meaning that bond yields should continue lower (bond prices higher) for several years. The contrarian in us, however, tells us this market has been overdone and that a significant setback is awating us in the not too distant future.

DJIA 8051.68	S&P500 1027.25
DJTA 2827.84	NASDAQ 1639.68
DJUA 283.74	30 YR BOND 5.36%

Stock Market Outlook: NEUTRAL

21-July-98

Stocks recorded smart gains over the past month. At yesterday's peaks, the S&P 500 and DJIA had each advanced over 7.5%, with the NASDAQ posting a hefty 12.3% gain. We were within a whisker of triggering a sell signal in our short term model at yesterday's peak, but the selloff that began today proceeded without our participation. Nevertheless, we switched our signal from BUY to NEUTRAL on the basis that the correction does not appear to have played itself out.

We are not looking for an important top at this juncture. The index of bullish minus bearish newsletter writers jumped to 28 this past week. That was enough optimism to trigger the current correction, but not the euphoria needed to signal something more significant. Our intermediate model is still in the BUY mode and our short term model could register a BUY within a few days. We expect this correction to be less severe and of shorter duration than the April-June selloff. However, an S&P 500 index falling below 1120 would indicate that a major top is in place.

In our March letter, we had forecast a further seven to ten percent gain in the large cap averages (DJIA, S&P 500) sometime this summer. As of yesterday, the S&P has achieved our goal with an 8.0% percent gain, while the Dow is trailing with a 5.2% rise. We are sticking with our prior summer objectives, in the expectation that the S&P 500 will move into the low 1200s as the Dow surpasses 9500.

Buying pressure in bonds has slowed recently and it may be that bond yields made a bottom in the first week of July. Look for a retest of the 5.57% level on the 30 year government bond. If that support holds and yields begin to climb higher, expect a rather dramatic "run for the exits". Rarely do we see as much bullish consensus as we have had the last few weeks. A strengthening in precious metal prices from this level is all we would need to begin the unwinding of enormous speculative positions in long term treasuries. That in turn could trigger an important stock market correction in late summer.

DJIA 9190.19	S&P500 1165.07
DJTA 3435.36	NASDAQ 1979.14
DJUA 288.24	30 YR BOND 5.67%

Stock Market Outlook: POSITIVE

22-June-98

Since our last letter, stocks generally moved sideways in a continuation of the recent corrective pattern. To date, the S&P 500 index has corrected a total of 5.2 percent, the DJIA about 7.5 percent, while the NASDAQ and Russell 2000 indices both exceeded a 10 percent sell off.

All but the NASDAQ are still in their respective corrective channels. The NASDAQ index broke out of overhead resistance last week, signalling what should be the beginning of a run to new highs. As for the S&P500 index, our short term model flashed a bona fide BUY signal on June 16. Our expectation is that this stock average is ready for a run to new highs as well, although a final retest of the 1075 level is not out of the question.

With the markets in this corrective pattern, the index of bullish minus bearish newsletter writers dropped briefly to 10 but rebounded the following week to 17.5. If the correction ends here, extreme levels [ > 40] in this indicator could easily be achieved this summer. However, if an intermediate top in the stock market is to occur sometime in the hot months, it more than likely will be accompanied by a rise in interest rates.

That's because the year-over-year change in consumer prices this month actually increased to 1.7%. And as the article Goldilocks Meets the Bear makes clear, an inversion in the relationship between stocks and bonds would require a "zero inflation" environment.

Bond yields made a solid move lower, contrary to our expectations. Admittedly, we jumped the gun on our bond model, anticipating a sell signal in the week following our last letter. That signal was delayed by falling gold prices, but the rebound in the metal this week finally triggered the expected sell signal. This model is approximate so don't be surprised if the buying momentum in bonds continues for another week or two.

DJIA 8711.13	S&P500 1103.22
DJTA 3388.48	NASDAQ 1805.82
DJUA 289.02	30 YR BOND 5.66%

Stock Market Outlook: POSITIVE

25-May-98

Thus far, the S&P 500 index and the DJIA have corrected about 5% while the NASDAQ is down 7.5% from its April high. It appears to us we are very near the bottom at this point and have switched our short term model to a BUY. The S&P and the Dow averages have formed a contracting triangle over the past month and should have stored up enough energy to generate a solid upward thrust once they break out of this pattern.

While the markets were in this corrective pattern, the index of bullish minus bearish newsletter writers never dropped below 20. If this extraordinary bullishness continues, then a run into new highs would likely produce extreme levels in this indicator, increasing the odds of an intermediate top in stocks this summer.

The year-over-year change in consumer prices this month held steady at 1.4%. There doesn't appear to be any imminent danger of the markets moving into a zero-inflation environment which would in all likelihood trigger a significant price correction. Read the latest addition to the Mind Stretch section of our web site entitled Goldilocks Meets the Bear to understand how such a scenario might unfold.

Gold stocks seem to be taking a breather right now which has moderated the bullion itself and taken the pressure off of long term interest rates. Bond yields still look as though they are moving higher in the near term.

DJIA 9114.44	S&P500 1110.47
DJTA 3390.59	NASDAQ 1805.00
DJUA 280.06	30 YR BOND 5.90%

Stock Market Outlook: POSITIVE

27-Apr-98

Since our last letter, stocks turned in a mixed performance. The Dow Industrials and the NASDAQ are up slightly, the S&P500 down slightly. This sideways move had a convex shape to it - higher in the middle and lower at the ends. We feel the odds favor another sideways move in the coming month. This one we expect to have more of a concave shape to it - higher at the beginning and end, lower in the middle.

Record highs were achieved last week in the major averages. On Wednesday our short term indicator came within a whisker of triggering a SELL signal and it began to look as though the market would dodge another bullet. After several mild days to the downside, however, today left no doubt that a correction was underway. The short term model remains at NEUTRAL (100% stocks) so we will ride this one out.

How deep the correction? Our best guess is somewhere in the 5 to 10 percent range. During today's selloff the S&P500 nearly reached the low end of that predicition when measured against its all-time intraday high. Our expectation is that stocks will bottom this week in a climactic selloff. If they do, expect a bounce and then a retest in two weeks. After that, the market should be set for another run to new highs.

The index of bullish minus bearish newsletter writers reached a very lofty 31.5 this week. Anything above 20 in a normal bull market is considered overbought. The market action we expect in the week ahead would normally dampen enthusiasm significantly, sending the index below zero. If the index remains above 15 throughout the correction, odds would favor our scenario of a market top this summer.

Gold stocks are up an astounding 40% off their lows of the year. Price changes in gold stocks are normally a precursor of the underlying metal prices. Gold bullion should continue to move higher, then. This is having a negative impact on bond yields in the short run and it looks as though 6.25% is in the cards.

DJIA 8917.64	S&P500 1086.54
DJTA 3448.67	NASDAQ 1820.31
DJUA 276.76	30 YR BOND 6.06%

Stock Market Outlook: NEUTRAL

22-Mar-98

Stocks exceeded our expectations this past month with the NASDAQ moving up a solid 3.5 percent, and the S&P500 & DJIA both exceeding 6 percent. We had expected a sideways to down move lasting about three weeks before stocks pushed on into new record highs. Instead we got a short one week sideways move followed by a small explosion. In fact, the stock market blew right through two short term sell signals from our trading model.

As we see it right now, the market has an upside potential of an additional seven to ten percent this year. That would bring the S&P500 into the 1200 neighborhood with the DOW approaching 10,000. Of course, markets do not move in straight lines for very long and this one has been doing precisely that for two months now. Although we are not getting a short term sell indication from our trading model, April often presents a buying opportunity. For these reasons, we expect the market to take a breather soon for a few weeks before continuing its advance.

Should the market attain the levels we expect this year, the S&P500 would be very close to the forecast we made back in 1993 that the market would triple from its 1994 correction lows by the year 2000 (the closing low of 445 at the end of the 1994 correction occurred on December 8; three times that value puts the S&P500 at 1335). If stocks perform as they have the past three years, that projection is a shoe-in. More likely, however, after reaching our targets for the year, we would expect stocks to move into a bear market.

This is precisely the asumption we make. Sometime this summer, there is a strong likelihood that the 3.5 to 4 year cycle top will occur in stocks (last top was February 4, 1994). If inflation continues its present course, this event would uncharacteristically take place as long term interest rates fall. Such a bear market (a minimum 20 percent retracement) would then have to be followed by a very strong market in order to achieve the projection. That is well in line with our longer term view that stocks will eventually double from current levels by the year 2008.

DJIA 8906.43	S&P500 1099.16
DJTA 3586.92	NASDAQ 1789.16
DJUA 285.68	30 YR BOND 5.88%

Stock Market Outlook: NEUTRAL

24-Feb-98

All the major indices made record highs since our last letter. The NASDAQ was the strongest with a 10.1% gain; the DJIA was next with a 7.1% gain, followed by the S&P 500 with a 6.4% gain. Yesterday, it looked as though the market was preparing for another upward surge. But that was yesterday.

Over the past month, the NASDAQ composite index broke through overhead resistance at 1650 and rocketed to a nominal new high yesterday. Today, however, the market rejected that record close. At the same time, our short term model for the S&P500 index flashed a sell signal, due primarily to the back-up in bond yields. Could there be a bear market lurking? The charts for the large cap indices (DJIA, S&P500) just do not indicate that this is the case. Rather they suggest more new highs after a period of consolidation.

The index of bullish minus bearish newsletter writers is confirming this as well. At a level of about 15, it is in normal bull market territory. And our intermediate model has dodged a major bullet (for now). The January CPI was reported this morning at 161.6, a 0.2% increase over December. That held inflation (at 1.6% annualized) high enough to prevent the stock-bond relationship from inverting and triggering a sell signal in our model.

So expect some downward to sideways movement before seeing further new highs in the large cap indices. If the S&P500 breaks below the 985 level, however, then something larger is brewing. If the NASDAQ weakens here and is unable to make a new high with the other averages, then this recent move would turn out to be the completion of a double top formation. This would confirm the suspicion we have been carrying the past few months that this index is in a bear market.

The primary trend for the government long bond is still up (yields falling) in spite of the recent weakness. Gold's next big move may be a retest of its recent lows.

DJIA 8370.10	S&P500 1030.56
DJTA 3418.84	NASDAQ 1738.71
DJUA 268.22	30 YR BOND 5.97%

Stock Market Outlook: NEUTRAL

28-Jan-98

For the second consecutive month the Consumer Price Index (CPI) fell from the prior month. It came in at 161.3 in the month of December, 161.5 in November, 161.6 in October. If all economic indicators remain at their present levels, our intermediate model will be flashing a sell signal by the third week in February. This is a warning, not a prediction. But keep in mind that stocks peak every 3.5 to 4 years and the last peak was in February of 1994 (the six prior to that occurred in 1972, 1976, 1980, 1983, 1987, 1990).

In the short run, the market appears poised for a rally. Neither the S&P 500 index nor the DJIA made new highs since our last letter. Our expectations remain optimistic that at least the S&P 500 will make new highs. Recall that the Dow's high was set nearly six months ago on August 6th at 8218.34, while the S&P peaked on December 5 at 986.30. At current levels the Dow is 5 percent below its peak while the S&P is less than 2 percent below.

The NASDAQ is still struggling to pierce the 1650 level. As we pointed out last month, we believe that small stocks have enterred a bear market. A close above the 1650 mark along with a new high in the Dow Industrials would suggest the correction is over.

The government long bond is currently selling off from an overbought condition. The trend for this security is still higher, with long term interest rates in decline. Gold looks as though it has put in a temporary bottom.