Steve Leuthold, was warning investors in his Grizzly Short Fund to take profits and lighten up on their positions. It was the second time in this decade that Leuthold had issued such a warning, having made the previous call in the fall of 2002.

Since then, the normally skeptical Minneapolis investor has turned into something of a short-term bull, expressing amusement at the "Rodney Dangerfield" market that has raced steadily higher in the face of a nasty recession and a severe shortage of positive fundamentals. A classic big-picture manager, Leuthold not only manages money but also markets investment research to many of the nation's largest financial institutions.

Interviewed in late September, Leuthold remained confident that the market would rise "considerably higher" in the next six months, with the Standard & Poor's 500 index poised to climb another 25% to 1,250 or 1,275 by the second quarter of 2010. There could be a modest period of consolidation in early October as investors reduce recently established positions because of end-of-quarter, underperformance fears, Leuthold says, but at some point in the fourth quarter retail and institutional investors who have kept too much money on the sidelines will capitulate and plunge into equities.

But in no way does he believe that this is a time to be a raging bull. "I don't think this is a new secular bull market that could go through 1,550 on the S&P 500," he says. At present, "we're in the second half" of what he terms a cyclical bull market that could play out a lot like the one in the late 1970s.

So how is Leuthold positioning his funds to play what is a vexing environment? He's betting that, as the economy stabilizes, the nascent boomlet in merger and acquisition activity could turn into a full-fledged explosion.

It's become increasingly clear that corporate America is finding revenue growth much more difficult to achieve than bottom-line growth. Slow-growth economies often trigger waves of consolidation. As cash piles on corporate balance sheets while prospects for organic growth stall, many companies opt to redirect funds from capital spending projects into acquisitions.

Consequently, Leuthold is moving down the capitalization hierarchy in hopes of investing in future acquisition targets. This particular strategy is being employed in two industries that are longtime favorites of growth investors-technology and pharmaceuticals.

"Big Tech is losing momentum," he says. "So we've reshuffled and gone into smaller tech. Big tech is loaded with cash; some of them have one year's sales worth of cash on their balance sheets. Look at what happened with Dell and Perot Systems."

In September, Dell agreed to buy Perot Systems for $3.9 billion. Leuthold doesn't like to talk about individual stock positions, but past tech holdings have included Microsoft, Cisco Systems, Qualcomm and Intel.

Many of the tech companies he is now buying have market caps of $1 billion to $2 billion and focus on data processing, consulting and other areas of innovation. "We feel tech is in a leadership position and we don't want to be underweight," he says.

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