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A raging stock market, two Interim Memos in a single month, the Major Trend Index jumping up and down like a short-term trading tool, January was quite a month around here.

In January, our Major Trend Index, employed to assess the overall health of the stock market, has jumped around like some short-term oscillator.

Even after the excitement of early January, it still looks like a major cyclical bull market top is in progress.

1986 full year and final quarter performance for the major sectors the Leuthold Group regularly tracks, as well as some other areas of interest we are monitoring.

Current estimates are that only about 30% of the professional managers beat the S&P 500 this year, with its 18.4% total return. The DJIA produced a total return gain of 26.9%.... I wonder how many beat that?

Historically, have tax cuts been a stock market positive? Have tax increases been a negative? What impact do changes in the tax rate have on prevailing market P/E multiples? The answers to these questions may surprise some of our readers.

In this business, it is often best to conveniently forget what was said in the past. But unfortunately, when the opinions are written down and published, this does not always work. At any rate, this publication has a sometimes embarrassing commitment to full disclosure. So again, we will include our old (1986) crystal ball gazing right along with this year’s predictions.

The bond market traded in a narrow range in December, but did show some spark in the first days of the new year. For most of December, it looked like the bond players took an extended vacation.

Happy Holidays……Japan International Banking……Remember, patience is a virtue if you want to buy a farm.

Having been a super bull on the bond market since 1981, this publication has turned more cautious. A number of readers have asked for details and elaboration. Today we still view the bond market trend as up, but think a sharp decline might occur sometime in 1987, with T-bond yields rising by as much as 300 basis points.

The Major Trend Index deteriorated some and remains negative, as it has since mid-June. Major cyclical bull market top in progress. Shorter term work (Early Warning Index) rendered a “sell” signal on Nov. 21, after giving a “buy” signal on Sept. 15. The Bears may have Christmas.

For the most part, the market’s leading and lagging sectors were a continuation of October’s trends. Quality Growth did well, while deep cyclicals, inflation sensitive issues and financials lagged. Again, we suspect the derivatives had some impact, as big capitalization, heavy weight growth issues typically performed well.

We may have to wait for a while to see the next major cyclical surge in the secular bull market born in 1974, but when it gets underway we think the Technology sector will probably lead.

We continue to believe the Japanese Oil Patch invasion will develop and the sector continues to look oversold and cheap, with most institutions significantly underweighted. Larry Jeddeloh spent part of November on the west coast, combining a research trip with some client visits. Here are his observations.

Today’s normalized P/E multiple is close to the high quartile, with dividend yields in the low decile and book value ratios close to their high decile. The cash flow ratio is about at its historical median, but other benchmarks demonstrate the stock market’s potential downside vulnerability.

Today, many are concerned about the potential negative impact of deflation and the stock market. Our work demonstrates that moderate deflation has typically not been a hostile stock market environment. However, deep deflation (5%-11%) has historically been a bad time for stocks.

Update on the coming Japanese Oil Patch invasion: We are now even more convinced, it is only a matter of time.…ARFF (Angry Revengeful Frequent Flyers) – You too can be a member!

The Major Trend Index improved slightly but remains negative, as it has since mid June. The October rally was no surprise and could carry farther, momentarily making new highs in DJIA and S&P 500 (but not broader measures). A major cyclical bull market top in progress. Watch out. View rally as selling opportunity.

Here again are some of the client queries we have had over the last month or so.