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(March 20, 2002) STOCK INDICES: My early March turning point high for stocks has so far held. But, technically the case could be made that the DJIA should test 11,000, and possibly even 11,500; that the S&P 500 could rally to 1200--1250, and possibly as high as 1300; presently, the NASDAQ will be lucky to make it back to 1700 1800. June NASDAQ resistance increases at 1600, June S&P resistance at 1200, June DJIA resistance at 10,800. The June DJIA will have to close on wide range and heavy volume below 10,500 to turn the minor trend down; the June S&P below 1150; the June NASDAQ below 1480. The Dow Transports have been the strongest member of the Dow complex, the Dow Utilities the weakest, but the Utilities have bottomed. Emerging markets often lead global markets higher. The strength in the stock markets of Thailand, Taiwan, Mexico, South Korea, (and Australia) are encouraging in this regard. Emerging stock markets are 11 of the top 12. Longer term, real problems for real people and real companies remain. The S&P 500 price/earnings ratio is nearly three times the long-term average. The P/E for the S&P 500 is nearly 44 times sales. Book value for the S&P is approximately 220. The S&P 500 is at 1160. Will the S&P 500 lose 80% to get back to its book value? What about the Wilshire 5000 Stock Index of 6500 stocks, still down approximately $4.5 trillion from its all time high? Will that money return from money heaven? The Wilshire 5000 as of February 1 was worth $12.7 trillion, which is 129% of GDP. U.S. GDP is $9.9 trillion. Historically, normally, stocks are valued at roughly 54% of GDP. So the stock market is nearly 75% overvalued in terms of GDP. Will we eventually see a 75% to 80% decline in stock market values from the highs? From these levels? How will corporations fare which have record debt with real interest rates of 10.5%, with nearly $5 trillion of debt? How long until mutual funds, such as Investor's Business Daily's Mutual Fund Index, truly recover? Remember that the first rally after a major break (9/21 exhaustion selling) is usually a fool's rally. We are coming upon the time for April fools. This is when my next major turning point is, March 28-31/April 1. An April turning point is usually common for stocks. The financial markets could get hit then. This is the time of Easter, too. Recall, also, at the end of March is the end of the Japanese fiscal year, as well as a full moon coinciding with our turning point, a time of emotional instability, solar and magnetic storms, with the potential for earthquakes, volcanic eruptions, and the like. Japan is particularly vulnerable. The Japanese government and central bank have basically manipulated the rise in the Nikkei Dow by limiting short sales. The yen rose for a bit too, but then gave up its gains March 18 and 19. Will the Nikkei Dow do the same? With reduced deposit insurance, leaving little incentive for Japanese to hold yen after the end of March, will they not instead opt for gold, Swiss franc and euros? The market bottomed on fall equinox. Will it top around spring equinox? The seven largest U.S. banks have $33 trillion in derivatives on their books which is over three times U.S. GDP. These same seven largest banks have only a total equity of $460 billion. Remember, too, that a stock market bubble and a debt bubble run together like two horses in the same harness. The stock market bubble has been pricked. The debt bubble? Why should we trust stock market brokerage companies when mutual fund companies pay these stock houses $1 billion a year to market their mutual funds, to sell their products? This is effectively investment bribery. There is real truth behind the phrase "load funds." Small wonder in this environment we continue to favor value stocks over growth.

RECOMMENDATION--Futures investors who purchased put options in June S&P--hold. Futures investors may sell June NASDAQ short with 1563 open protective stops looking for a break below 1300. Add to June NASDAQ short positions, selling short ona stop and a weak close below 1480.

R.E. McMaster, Jr.

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