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Last month we adopted a tactically bullish position towards high quality bonds while remaining very cautious towards equities.

For a number of years, we have used Jim Floyd's computer screen to isolate stocks most likely to score the largest gains from early December through the end of January.

The table on the next page is a performance run down for our equity market sectors ranked by fourth quarter performance.

For a number of years we conducted an annual exercise each January, examining the previous year's leading and lagging stock market groups.

Self examination can be good for the soul, so each year time is taken to look back over the preceding year or so, critically reviewing the significant studies, portfolio shifts and recommendations appearing in this publication. Including the good....and the bad.

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I continue to believe that at least a mild recession is in the cards for 1990 and that the deficit will soon start to expand. However, I no longer think this will be a strong negative in terms of bond market psychology, at least not over the next six months or so.

It continues to appear that the stock market is forming a major cyclical bull market top. The Major Trend Index continued to deteriorate in November and indicates the market is in poor health and a cyclical bear market is likely.

Remember the basics: A slowing economy should bring lower interest rates but it also typically brings declining earnings, not usually a good environment for stocks.

A performance run down for our equity market sectors ranked by November performance. All screen based Quantitative Themes are included, both active and experimental.

For 10 years, The Leuthold Group has been sending out a list of year end trading suggestions. In November and December, we go “bottom fishing” for stocks that are overextended on the downside. This is an updated and revised list from the one sent out in a mid-November 1989 Interim Memo.

In November, we had a number of clients inquire about the current status of our earnings momentum monitor, so we have again decided to publish an update of this work. Just a cursory glance at our Advance/Decline chart is all that is needed to see that the earnings momentum is slowing dramatically.

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With the October 30th calculation, The Leuthold Group’s Major Trend Index has shifted into negative territory. Thus, our disciplined weight of the evidence approach dictates a very cautious policy.

Using history as a guide, the current secular bull market may run another 5 years or more. By historical standards, it is well past middle age, but is not yet ready to keel over.

A performance run down for our equity market sectors ranked by October performance.

The purpose of this issue’s “In Focus” is to provide readers with a better understanding of our Major Trend Index and answer some of the typical questions asked about this work.

The recent results of this work clearly show that the corporate earnings momentum is slowing. In the second quarter of 1989, there were 2867 up earnings reports versus 1982 down earnings reports for a ratio of 1.45. This ratio matches the lowest ratio registered in this limited historical study.

Inflation continues to cool and the economy is providing more evidence of slowing, but we still have our reservations about the bond market and remain cautious.

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