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THE REAPER
P.O. Box 84901, Phoenix, Arizona
(November 12, 1997) STOCK INDICES: Expect continued volatility in distribution with a downward bias, possibly severely so before year end. The financial and technical sector is under pressure. Complacency among the investing public and the entrenched philosophy that the right thing to do is to buy stocks on dips ensures financial bloodletting. Individual investors still hold 46% of stocks as compared to 15% by mutual funds. The public holds over $4 trillion in the form of mutual funds. The Dow is yielding a paltry 1.7%. There is bearish divergence between the Dow Jones Industrials and the Dow Jones Transports. The $21 billion that moved into stocks in September sent stock prices nowhere. Distribution has been underway since mid-June. The growth rate in earnings is declining. U.S. multinational corporate profits are going to be hit. Next year's earnings projections will not be realized. This bull market in stocks that began in 1974 is aged. Insiders are selling. Merger and acquisition plans are being scrapped. IPOs are being tabled. On Black Monday, October 27, stock markets around the world lost $1.2 trillion. The Internet and World Wide Web were jammed with 100% increase in traffic. Volume on the NYSE exceeded a billion shares on Tuesday, October 28. The complacent investment psychology is giving way to fear. The price action of key stocks such as Intel, Microsoft, and Disney is sobering. Moreover, this is a global phenomenon. The only stocks I am really monitoring closely to buy now are the mining stocks and possibly the energy stocks. Then I will be looking for relative strength on general extreme weakness. The Rydex Ursa Fund is a way to short the stock market. Bill Gates lost $1.76 billion on October 27. Natural gas is in a bull market. A close by December S&P below 900 and the Dow Jones Industrials below 7350 should lead to accelerated selling.
RECOMMENDATION–Of the 10% of the long-term investor's portfolio that is invested in speculative stocks, utilities are clearly performing the best, followed by oil stocks and REITs. Seriously look at the 10% invested in mining stocks on weakness, particularly if mining stocks hold or appreciate in value while the rest of the stock market sells off, and/or if mining stocks move up with gold and silver. Investors who have hedged against the bear market in stocks, hold the 10% position in the Rydex Ursa Fund. Cautious and speculative investors who have hedged stocks by purchasing and holding LEAP puts on the S&P such as the December 1998 55 and 65 puts–hold. High-risk speculators expecting the bear market in stocks before year-end who have purchased put options hold the March 1998 put options in the S&P futures. Higher risk futures investors may sell December S&P short on rallies toward 950 with 953 open protective stops holding for a break to 800.
R.E. McMaster, Jr.
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