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Current trends continued this week. Domestic equity mutual fund net cash flows were positive for a fourth consecutive week (an estimated $0.6 billion), but decelerated after two weeks of strong net cash inflows.

We find hidden opportunities in Equipment & Services Providers, Coal and Natural Gas. We consider these themes longer term holdings instead of short-term plays

  The S&P 500 gained 4.5% (price only) in October. Based on the valuation metrics presented below, the S&P 500 has 12% downside to reach its historical average.

Our quantitative measures for the group and broad sector continue to improve; we think the recent relative turnaround in these stocks is poised to continue.

The Major Trend Index remained within a fairly narrow, bullish band throughout October, and closed the week ended November 1st at 1.17. This is compared with a final September reading of 1.16.

The Cap Weighted S&P 500 (+4.5%) slightly outperformed the S&P 500 Equal Weighted (+4.2%) during October. YTD, the spread between these two indices remains wide, with the Equal Weighted index outperforming by 4.2%.

Growth stocks are now all above their historical average valuation levels. Value stocks are all solidly overvalued compared to their recorded averages.

Multi-Line Insurance, Health Care Equipment, Pharmaceuticals and Automobile Manufacturers.

Small Caps are selling at a 16% valuation premium relative to Large Caps, using non-normalized trailing operating earnings. Using estimated operating earnings, Small Caps are selling at a higher valuation premium of 23% (25% last month).

The first month of Q3 earnings came in with an Up/Down reading of 1.73, just below the historical average of 1.81 but ahead of the first months’ readings for Q2 (1.59) and Q1 (1.38).

We like Attractive groups that make us cringe at the thought of potentially purchasing them. We take a peek at three groups - Airlines, Education and Managed Care - where we plugged our nose and bought.

The Major Trend Index remains positive, but we reduced our target exposure from 62% to 60% using a short ETF as we believe this position will be temporary in nature.

We are encouraged by the narrower spreads in October as the feared divergence between credits and equity markets did not continue.

We seem to be in a “Goldilocks” period, where economic numbers are not bad enough to re-ignite recession fears but are just weak enough to push the taper farther off.

Considering the market’s strength, we are pleased with the performance of our short portfolios.

Overall demand slack, stubbornly low velocity of money, an overall stronger dollar, painfully low labor cost inflation and weakness in commodity prices are strong disinflationary forces.

The Select Industries sold Railroads and bought Tech Distributors. For the second month in a row Global Industries saw little turnover and no equity group deactivations.

The Russell 2000 is about five points ahead of Large Caps YTD, and is approaching its April 2011 long-term relative peak. We view this outperformance as their leadership’s last gasp and not a new cycle.

We don’t think the numbers between now and the Fed’s December meeting will be strong enough to convince it to start tapering this year. No taper until 2014, in our opinion.

That leads us to think more about price momentum as an alpha-generating factor.