I mentioned in a recent report that we're in a secular valuation contraction, which means that sentiment indicators aren't likely to work in the same way as they used to.

Case in point: Mutual fund inflows and outflows. Investors have been pulling money out of equity funds consistently for the past year, and many strategists are saying that the rally won't end until they come back. During the last secular valuation contraction (1968-1982), however, equity fund investors started redeeming on balance in 1971 - and continued, consistently, to do so for the next ten years. (The chart, from the ICI website, shows equity fund flows from 1944 through 1996.)

Given this, it may be a long, long time before the public again embraces equities.

David Fuller's view Stock markets are experiencing a momentum move which commenced with the upward dynamic on 6th June, two trading days after the actual low following a correction in May. You can see this very clearly on a daily chart of the S&P 500 which remains the world's most influential stock market indices. Upward dynamics have dominated subsequently, with one exception, during the initial ranging phase of this rally.

The key influences during this move have been bullish monetary policy announcements from the European Central Bank and the US Federal Reserve. I have long maintained that monetary policy is the key influence on stock market trends (don't fight the Fed, etc).

Reactions have become smaller since early August, indicating that demand is increasing relative to supply. Also, this momentum move has steepened with the break above the March to May highs.

How high will this rally carry?

We can only guess but with the advance steepening this month it would be prudent to assume that we are now in the latter stages of this rally prior to the next correction. Resistance for the S&P (weekly & monthly) would be signalled by a clear downward dynamic or two, and a pullback that is larger than what we have seen since early June and a break in the progression of higher reaction lows, with the latest near 1400.

The S&P is now approaching challenging psychological resistance levels, commencing with 1500 and then the two imposing mountain tops from 2000 and 2007. It would be surprising if the Index did not at least hesitate near those former nosebleed levels.

However, I remain optimistic that the next bear market, whenever it occurs, will not fall anywhere close to this century's troughs evident below 800 and extending down to 666 in March 2009, at least not in nominal terms. This requires some explanation, not least because it may still be a minority view:

1) Valuations are lower than in 2007 and considerably beneath their 2000 levels, thanks to higher profits and dividend increases; 2) The Fed has once again cast its dye in favour of QE for at least the medium-term future; 3) Unlike in 2000, there is no equity bubble today; 4) Unlike 2007, there is no generally unrecognised banking / credit and housing bubble about to burst; 5) The USA is leading an era of exponential technological innovation; 6) Energy independence is within the USA's grasp within this decade, subject to political factors.

However, there are hazards aplenty: 1) The Eurozone's long-term problems of high debt and slow GDP growth, although rumours of the euro's death remain premature; 2) Global GDP growth is too slow; 3) Climate change due to a combination of natural and manmade factors is decidedly worrying; 4) Soaring budget deficits are out of control in many OECD countries and there is no easy way of returning to monetary policy normalcy following QE.

This latter factor is my biggest long-term concern. How will central banks extricate themselves from QE without roiling markets and their economies, and will rising government bond yields force their hand? We can only guess because this level of QE is previously unknown. Meanwhile, the Euro 30-yr Buxl (1st month) has broken beneath its 200-day MA and the upper side of its previous trading range this week. US Treasury 30-yr futures (1st month) have fallen sharply this week to test those same levels.