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From a shorter-term tactical standpoint, we have lit the caution light for both the stock market and bond market. However, there are some possible post-election developments that would be cause for changing this somewhat defensive stance and once again becoming totally committed to stocks and bonds.

The DJIA and S&P were unchanged for the month while the unweighted indices declined one or two percent. For two months in a row now, equities have lagged far behind bonds. There were however some groups and sectors that performed pretty well in October.

Several clients have requested information as to the components of the Early Warning Index. We have no secrets....well, not very many, so here are the tools we use to help in identifying intermediate stock market tops.

Examining our early warning inflation tools, we currently find few indications of an inflation resurgence. Only the CPI momentum work is somewhat disturbing. Herein we review this work, and also discuss the inflation outlook for 1985. In a strong economy, inflation could run to 7% next year, but the serious inflation danger lies down the road.

The pre-election target of 11.5% for T-Bonds was essentially achieved. Now the market looks overextended and a period of consolidation or correction is expected in November. Ultimately though, the upward move is expected to continue.

How High the Moon? How much longer can the strength in the dollar continue?.....Change in Outlook For “Value Stocks? Not really. Several months ago, this publication expressed concern over the growing popularity of “value” investing, reducing portfolio emphasis. Then in this issue we added three new “value” stocks to the portfolio. What’s going on?

From a portfolio performance standpoint, the stock market fizzled out in September. The market averages posted small losses for the month and those who were anticipating another surge on the bright side were sadly disappointed.

After the explosion of two months ago the stock market has gone nowhere. What is wrong with it? Well, I think it may be having some supply/demand problems.

Jim Floyd has just run new computer screens for the Consumer High Growth sector, Regional Bank Double Plays, the Undervalued & Unloved issues and the Growth Stock Bargain Basket. There are many changes. Each of these screens is discussed with all additions and deletions noted.

We look for higher bond prices by the end of October, once the Treasury financing is out of the way. Pension fund lock-up buyers remain a strong positive factor. But what is really needed is some post-election indication of political fiscal responsibility.

For several years now, this publication’s focus has been on long 20-year bonds, while many clients owning bonds maintain average 6-7 year maturities. Herein, we compare future performance of long and short bonds over several time horizons in a variety of projected interest rate environments, including projected parity levels for the stock market.

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.

The Major Trend Index is positive, but not as robust as a few weeks ago. The Early Warning work is okay, giving no indication of an impending major or intermediate market top.

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

Too many institutions are playing the sector rotation game. Typical portfolio turnover has increased considerably, and popularity has rotated faster than the rotary engine in a Mazda RX7. For the last year or so, our own sector strategies have been undergoing a change, becoming increasingly narrow. This is a significantly different approach than the broad economic sector approach that is now so popular.

A month by month listing of both conceptual and conventional model portfolio sector holdings, January 1982 to date.

In some ways, the bond market is more impressive than the stock market. We continue to think it may be a brand-new ball game for a while with a growing number of new players. Throw out your old rule books? Our pre-election expectation for T-Bonds is 11%-12%.

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.

In many ways the bond market is more impressive than the stock market. In some ways I think it is a brand-new ball game with a growing number of new players. Throw out your old rule books. We have raised our maximum pre-election expectation for T-Bonds to 10%, up from 11%.

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.