Prepared by

Dohmen Capital Research Institute, Inc.

In the August issue of this publication, which came out a few days before our August 7 sell signal on the large-cap stocks, I discussed many of the positives of the stock market, but also the negatives.

In that issue, I wrote:

“Watching CNBC every day, we can see a virtual competition of analysts trying to forecast an ever-higher Dow. We hear Dow 20,000 and even Dow 30,000 sometime in the future. These are wild-eyed guesses, not something based on analysis.

“One commentator just remarked that it is very difficult to think of anything that could interfere with this bull market.”

Those were signs of excessive enthusiasm normally seen at tops in certain sectors. I added:

“I agree, but it's a matter of history that tells us that when everything is absolutely perfect, `things can't get any better.' A nasty surprise is just around the comer. I don't know what it will be. This is not the time to throw caution to the wind.”

Yes, the nasty surprise has appeared. It was the collapse of the Asian markets. And it's not over yet.

My concern is that in the early phases, the Asian diseases will push the U.S. stock market higher, as money flees to the only safe haven left in the world. But the Asian problem is still developing. The biggest part of the problem, namely China, hasn't even started. As I pointed out earlier this summer, probably 25% of all the bank loans in China are defaulted, which is 4-5 times greater than the problem Japan is facing. Who will bail them out?

And then we have Russia. There is a bubble just looking for a pin. And when the bubble pops, it will be anarchy.

Thus, the initial flight to the safety of the U.S. will be a temporary situation. If the international crisis is not brought under control quickly, the second phase of the “flight to safety” will be to get out of all stocks. That will make T-bills and T-bonds the only place to hide.

At this very writing, Korea's request of $20 billion in aid from the IMF has been increased to $50-60 billion. And this is just a little country.

Therefore, it is highly probably that the next phase in the markets will be the typical year-end rally. But it will concentrate on stocks of companies doing business only in the U.S. That will be the key word on Wall Street from now on. You don't want companies with international exposure.

Then in January, at least for a short time, we will have a rally in the small-cap stocks, which normally do not have international exposure. So there's another theme for Wall Street to push.

But if in the second half of January the Asian problem is not resolved, we must batten down the hatches. It could get very nasty.

Therefore, as a strategy, we should use the next 6-8 weeks to lighten up our exposure in the stock market. If it turns out that the Asian situation is being resolved early next year, there's no problem in getting back in. But as we saw in October, if you think you can get out once the problem surfaces, you'll be faced with busy signals at your favorite brokerage firm.

But there might also be a great opportunity to make some money, if indeed the market heads downward again early next year. Talk to your broker now and get information on put options on the OEX Index. Or if you're not familiar with short-selling, get familiar with it. One book on the subject is called “The Art Of Short Selling,” by Katheryn Staley, by Wiley Books.

An alternative is to subscribe to our Fearless Fund Trader fax service (also available by e-mail) in which we will buy funds that are designed to rise in price as the market goes down. It's actually the easiest way to participate with very easy to follow instructions.

The way to profit from adversity is by being prepared. You must get prepared in advance, not when the problems surface.

Regarding the emerging markets, I wrote in the August issue:

“...those markets will be hit the hardest. Downmoves of 20-40% almost instantaneously will occur. Remember, to make up a 50% loss on your investment, you need 100% gain.”

In the September issue, I also commented: “the next big surprise will be an attack on the Hong Kong Dollar. That should plummet the Chinese markets. Everyone and their dog seems to be fully invested there.”In the September issue, I discussed a scenario which could cause a general bear market in the U.S. I wrote:

“We can see the deterioration in the emerging markets accelerating. Many have already had currency declines of 20-30%, which is causing short-term interest rates to soar to 25-35%. That of course, only accelerates the problem and does not support the currency. Currency traders know that the high interest rates will kill the economy and they keep selling the currency. But Central Bankers raise interest rates anyway, no matter how often it fails.

“As I pointed out last month, the bull market had suddenly become over-believed. Except for the perpetual bears, there wasn't a bear to be found. Analysts were continuously talking about the `Goldilocks' environment and saying `things just couldn't be better.'

“Well, when things can't get better, they can only get worse. Analysts always forget that it's not a certain level of the environment, but the change of the environment (that's important). From perfect, you can only go to imperfection. And that's a change to the negative.

“On August 8, I recommended raising 30-50% cash in your portfolio. I strongly urge that you have at least 50% cash in your portfolio now. Eliminate all exposure to the emerging markets.”

That was written in late August for the September issue. That alone should have paid for your subscription to Bert Dohmen's Wellington Letter for the next 10 years. At the time, the Japanese Nikkei Index was at 18,500. In the meantime, it's dropped towards the 15000 area. Hong Kong was at 15,000, which in the meantime has dropped below 10,000.

Regarding Hong Kong, I commented that the big upward surge in the market after the communists take over was “a blowoff.” I wrote in that issue: “If in fact, it was a blowoff, we could see the 7,000 area before the bear market is over.”

I concluded in that issue:

“There's no area of the world that has better fundamentals than the U.S. at the current time. Everyone else is basically `screwed up' as they say in the U.S.

“Europe is burdened with a humongous bureaucracy, and ancient politicians. South America is corrupt to the extreme, and Asia has all of the above, but does have cheap labor. However, cheap labor cannot compensate for poor governmental leadership.

“To me, it's incredible how intelligent people can believe their prosperity in Hong Kong will continue. At one time, this was the freest market in the world. Now, Communist bureaucrats control that market. They have been taught from birth that only government can make important decisions because the people are too dumb. How can a change from a free market to a Communist-controlled market result in prosperity, increased profit growth, and increased investment flow?”

So you can see that our analysis was way ahead of Wall Street, and certainly far ahead of the managers of Asia or emerging markets mutual funds.

Beware of bargain hunting,

It is always tempting to go bargain hunting in stocks or sectors that have declined substantially. But in bear markets, and I am talking about sector bear markets, that is a very dangerous exercise. Just because something is cheap doesn't mean it can't get cheaper.

Probably 95% of all analysts use strictly fundamentals and have no clue when it comes to technical analysis. Therefore, when they see a stock drop from $100 to $80, they might think it's a bargain.

When it's down 50%, it might look like a real bargain, just before the news of poor accounting, a drop in sales, etc...is announced.

Looking at the technicals, however, one can get a better idea whether a stock is bottoming or merely on its way to even lower lows.

Let me give you an example. Investors Business Daily in an article on November 5 quoted one Wall Street technical analyst about some of the fundamental virtues of technology stocks which she thought were bargains at the time. Let's just look at two of those stocks.

She thought VLSI was a great buy, at the time selling at 32. On November 27th, only three weeks later, the stock was at 22-5/8, a big 38% percent decline.

Texas Instruments was selling at a pre-split $120. On November 27th it was going for a pre-split $97. Using fundamental analysis, you must have a strong stomach.

I remember other sector bear markets over the past three years, such as the semi- conductors. Micron Technology, an institutional favorite, was over $90 in 1995. It then starting heading down amidst continuing “buy” recommendations. A technical analyst would have gotten out at least in the $72-$76 area. In 1996, one year later, the stock was selling at 16. Institutional analysts were recommending purchases all the way down.

I will not let this happen to you. We avoided the big bear markets in 1994, in the worldwide markets including Mexico and Latin America, and every disaster since that time. Avoiding disasters is much more important than trying to catch the elusive hot stock.

As far as technology is concerned, there are different component sectors. Technology will continue to be the fastest growth area of any industry in the world. But one must be selective, and not be in those areas that are vastly overpriced or becoming commoditized. Once again there is a huge glut in memory chips. 16 MB chips currently are being sold at less than $4, which is less than manufacturing costs.

I am not a technology analyst, and I have seen many so called “experts” in technology getting seriously burned over the years. But I approach the markets more from a psychological basis. Whenever you have had a big run up, and widespread euphoria about a sector, buying eventually becomes exhausted. When mutual funds, which are supposedly diversified, suddenly have 50% of their portfolio in technology, the market is “overbought.” That happened in August of this year.

After that comes the selling phase. First it's mild, then it speeds up. After all, if you are one of the huge diversified funds, and own $30 billion worth of tech stocks you want to sell, you cannot do it in one day. Finally the word gets out that the biggest owners are sellers. That triggers other selling. It finally leads to dumping.

Sector bear markets usually last from 6-12 months. Corrections last 1-3 months. If you like tech stocks, you must be selective.

The oil drilling stocks were seriously hit during October, and the fund managers in that sector are puzzled. I spoke to several at the Schwab Institutional Conference in San Francisco. They have not changed their bullish stands. The bullish story is that drilling rig companies are getting daily rental rates from $150-190,000, compared to about $45,000 a year ago. That is a pretty nice increase in profit margins.

Hasn't this already been factored into today's price of these stocks? For the year, the oil drillers have gained 80% in price. Many declined from 20-30% during the recent massacre. That might make them bargains. But if the recent lows are penetrated on a closing basis, watch out. From a technical point of view, it would show that there are not enough buyers willing to step up to the plate. And the only thing that can change the price of the stock is a change in supply and demand.

During November, I attended the excellent Schwab Institutional Conference in San Francisco. Some 1,600 investment managers, large and small, participated. It was great seeing Chuck Schwab, his right hand Hugo Quackenbush, and president David Pottruck again. The first Schwab conference ever was held at the Bank of America auditorium in San Francisco in the early 1980s, when Schwab was still owned by Bank of America. There were two speakers: Charles Schwab and Bert Dohmen. It has certainly evolved.

At this year's conference, Collin Powell gave a key note address. But my favorite was Abbey Cohen, chief analyst from Goldman Sachs. She has been bullish throughout this bull market. She backed up her bullishness with facts. It will be interesting to see if she can turn bearish when it is time to do so. But for now, I agree with her on the fact that the market is not overvalued although certain areas are.

She believes that we are in the midst of a long-lasting economic expansion, which is marked by low inflation expectations, (emphasis on “expectations”). Therefore, consumers are not in a hurry to buy. In fact, they have more of an incentive to delay purchases, as prices appear to be heading down in many areas.

The budget deficit is declining and may soon turn into a surplus. Fiscally speaking, the U.S. is in better shape than any industrialized nation.

She talked quite a bit about return on equity (ROE), which has been between 20-23% in the last years. That is the highest in many decades. In comparison, ROE in Europe is 3% and in Japan 4%.

Durable equipment investments have soared. This happens only once or twice in each century.

The U.S. has moved from “low value-added” products to high value-added. Productivity is very strong, and unit labor costs are still declining. We must emphasize “unit.” That is why an increase in wages is not inflationary.

She believes that small caps stocks are now more attractive because of two reasons:

a. The capital gains tax cut.

b. As a substitute investment for emerging market investments.

Regarding valuation of the market currently, the S&P 500 index is selling at a PE of 18 based on 1998 earnings. That is fair value.

In regards to the low dividend to price ratio, it is due to pay outs now at 34% of earnings, compared to the previous 70%. In other words, companies are retaining more of their profits. I have pointed this fact out over the past several years. Companies are being more tax efficient, using excess cash to buy up their stocks. This benefits shareholders more, because it creates a capital gain. If they paid the profits out, there would be double taxation of those profits.

Abbey said that the return on capital for corporations currently is the highest ever. There is now over one trillion dollars in money market funds. At least some of that is potential capital for new stock investments.

And what of the arguments of the bears that we have seen a stock market mania, with households being overly invested in stocks? She counters that by stating that household ownership of equities is currently 34%, which includes stocks and mutual funds. Historically, that is the normal level.

She expects the S&P 500 index in 12 months to be at 1050.

Another interesting presentation was that from bank specialists Keefe, Bruyette, and Woods, Inc., conducted by David Berry. As you know, this is one of my favorite sectors. Bank stocks should react very favorably to the decline in interest rates which I foresee.

There is a chart of price earnings multiples of the S&P 500 compared to that of the KBI index of banking stocks. You can see that in the early 1960, the PE's were similar. But during the late 1980s the PE difference expanded as banks got into great difficulties. Remember, in 1991, the Federal Reserve had to stage a big bail out in order to save the large money center banks.

But since 1995, the PE ratio differential has been narrowing. If interest rates get back to what we saw in the 1950s, which I believe, then we should see the differential disappearing. Having the PE's of banking stocks go from 15 to 19, while earnings are rising, could be quite exciting.

Fundamentally, the ROE of banks over the past 17 years has only been higher in one year, namely 1988. It now stands at 17.5%.

But from time to time, we continue to hear scare stories about the number of non-performing loans at banks. Credit card debt is rising strongly, but most of that debt is being paid off within 30 days. Credit cards are being used as a convenience item, not as a means of borrowing.

I often feel that such scare stories are designed to shake people loose from their bank stock holdings, in order to give the professionals some new supply. There is a chart of the KBI index “nonperforming asset ratio.” Note that the nonperforming assets have been in a steep decline. There is no inkling of this ratio rising.

As I indicated in our last issue, the late October crash was severe but very short. For most funds it lasted about three days. That certainly was not enough time to get out and then get back in. On the day of the crash, October 27, the IBD mutual fund index plunged a hefty 7.9%. That was the major portion of its entire decline. Since that time, it has been upward and onward.

This shows to me that just as in 1987, it was not the start of a bear market, but basically a shock to the system. After the 1987 crash there was a featured front cover magazine story with “yours truly,” headed “Still Bullish After the Crash.” As you know, the same story could have been written after this years crash.

For investors, the next important event to look forward to is the typical year-end rally, to be followed by the “January effect.” The latter involves a strong upmove in the smallcap stocks, which are usually sold before year-end because of tax loss selling.

In the past 45 years, small caps have beaten the S&P 500 40 times in January.

The skeptics say that this year there will be no year-end rally, nor a January effect. Well, I would rather go with the odds, which say we will. The small-cap area is one where you can still find some bargains.

That is a debate I am well familiar with. One service, which allegedly rates the performance of investment newsletters, does a “risk adjustment” of performance numbers using volatility. Some of the smartest people in my business have disagreed with the owner of that service. As these colleagues are investment experts, and the rating service is run by someone who told me years ago that he had never invested, I obviously lean towards the point of view of the investment advisors. Volatility is not the same as risk.

Now another columnist of Forbes Magazine, David Dreman, author of the book “The New Contrarian Investment Strategies,” addresses the subject. He writes:

“Go back to 1990. I recommended bank stocks in Forbes. At the Kemper-Dreman High Return fund, which I manage, we bought heavily into them during the summer. I was right about the value, but a bit early on the timing, and these stocks dropped further after I bought them. This drop made the portfolio more volatile, but certainly did not make it riskier.

“You could have bought CitiCorp for under 11 and Wells Fargo for under 42. (CitiCorp now is 120, and Wells Fargo now is 307). At the very time they were screaming buys, these stocks caused the portfolio to be labeled risky by many of the rating services.”

He advises: “Forget Beta and other pseudo- scientific risk measurements. Forget the mumbo-jumbo and look for value.”

I suggest that Mr. Dreman have a cup of coffee with his fellow columnist, Hulbert. Maybe Dreman can convince him that volatility is totally different than risk.

Another columnist of Forbes, Mr. Birinyi, an intelligent investment analyst, did a critique on technical analysis. We actually should not mind, because it keeps more people away from a discipline which has allowed us to catch precisely many tops and bottoms of markets or sectors over the years. The fewer people use it, the better it is for us.

However, I am compelled to point out some of the poor thinking in his effort to denigrate technicians. He writes that in 1987, “technicians, economists and strategists generally missed the crash.” Then he adds: “I will forgive those failed calls, but then the technicians badly missed the recovery.”

Note how he puts all technicians in one boat. I gave an all out “buy” signal for the precise day of the bottom.

One could also say that all the fundamentalists clearly missed the crash and the recovery, because just about every fundamentalist I know was looking for a recession and a bear market after the crash.

He does the same generalization for 1985, when supposedly technicians stumbled. He notes: “The market traded under 1,300 in mid-September, the general attitude was that support was broken, and one report stated that `stocks are likely to witness further prolonged stock weakness...'”

Note how he uses the word “general attitude,” and then uses “one report” to allegedly reflect the attitude of everyone.

If you substitute the word “fundamentalist” where he uses “technicians,” the statements would be just as unfair and inaccurate.

Subscribers know that it is possible to time the markets. In fact, sometimes, very precisely, to the exact day of the top or the day of the bottom, or more often one or two days from those important turning points. Our track record shows it. It can't be luck.

Using technical analysis, one can obtain many clues to such turning points. But of course, nothing is perfect.

In fact, the most often heard phrase on Wall Street is “no technician can always catch the tops or bottoms.” This is then taken as the gospel that no one should try. If you cannot achieve perfection, it's obviously not worth doing.

But think a little bit further. Do you know of any endeavor in life where we can reach perfection? I do not, yet we continue to try. Babe Ruth, Michael Jordan, Pete Sampras, etc., are all the best in their own areas. In fact, they are the world's best. But they will be the first to admit that they are far, far from being perfect. A fundamentalist would tell Sampras that “no one” can win every game or match, and therefore he should give up tennis.

Those on Wall Street who put down technical analysis should explain to us how fundamental analysis is perfect. Isn't it a fact that many of the best investment professionals on Wall Street, and many of the most highly celebrated mutual fund managers, always get caught in devastating crashes, whether the U.S. market or markets around the world? Obviously fundamental analysis is far from perfect.

In fact, I would put our track record next to that of any fundamentalist.

We also hear that the “majority” of technical analysts do not outperform an index, such as the S&P 500. There are two things wrong with that statement:

First of all, the “majority” of fundamental analysts don't do it either. In fact, over the past ten years, 82% of all mutual funds have under-performed the S&P 500.

Secondly, it assumes that when we look for an advisor that we should always settle for what's called “the majority.” But the majority in any profession is just “average,” by definition. Why settle for “average?”

When you ask someone to recommend to you a doctor, a lawyer, or CPA, do you ask “do you know an `average' doctor, lawyer, or CPA?” No! You ask for a “good” one. You don't want to settle for “average.” You want “good.”

Seeing that the “average” technical analyst does not outperform the major market index is meaningless. The “average” of anything does not out-perform the “average.” The “average” runner does not run a four minute mile. Does that mean no one can? Many people have done it since Banister showed the world that it could be done. Before that feat, many experts, including doctors, said that the human body did not have the endurance to run one mile in four minutes. The experts were wrong.

The moral of this story: Statistically, you can prove that the “average” is incapable of doing pretty much of anything. We should not strive to seek out the “average,” but always go for the best. When you find the best, hang on.

In the investment management field, there are a number of people who are among the best, almost year in and year out. Occasionally they will have a bad year, just to prove they're human. The fact that such individuals exist is proof that it is possible to know when to enter certain markets or sectors of the markets, and knowing when to sell. That is called “timing.”

Yes, you can time the markets successfully. Not always, but a major portion of the time.

This chart shows the Dow Jones Industrial's 1,000-point recovery (till December 1) since the low in late October. The extent of the recovery strongly suggests that this is not just a bounce, but it is an upmove that will eventually go back to the old high.

The chart of the Dow shown here is a line chart, which connects the closes. It does not show the intraday highs or lows. On a technical basis, the corrective process on this long-term chart appears to be a “flag” formation. A “flag” formation is an intermediate-term consolidation. The break-out usually goes to the upside, with the next upleg being as long as the previous staff of the flag. That would project about 9,200 on the Dow as a potential target.

This long-term chart of the Dow Jones Utility index shows the phenomenal upside breakout this year. It is now at a record high, with no suggestion of a near-term top. The weekly Dow Transports chart is also bullish, showing how insignificant the recent correction was, compared to the long-term trend. It was nothing but the hiccup.

The Morgan Stanley Consumer index is at a new record high.

The short-term chart of the NASDAQ Financial Index shows a bullish formation. This one is going to a new record high soon.

But then look at the NASDAQ Industrial Index. This looks sick in comparison. To me the difference confirms expectations that the economy will be much weaker next year, and that there will be some strong deflationary pressures. This will lead to significantly lower interest rates, but also a profit pinch at industrial companies.

The PSE Technology Index is in a consolidation pattern. A break out could go to either side. But it must move decisively above 320 for this long-term bull market to stay in place. A break below 280 would confirm a bear market to me.

The emerging bond markets took a big hit in late October. Suddenly it was a scramble to safety. As you know, this has been my favorite for several years. But when it started breaking down in October, it was a sign that something was seriously wrong in the financial markets. The breakdown actually started before the alarm bells were ringing on Wall Street.

Now the question is: should they be bought, or is it a time to sell if you have them? In my opinion, it is probably an excellent buying opportunity. I expect interest rates worldwide to go lower.

But that alone won't make emerging bonds more attractive. Are these bonds secure? I believe that the current yields compensate for the risks, and that a portion of your money could be placed in this area. At minimum, we should see a rally back to the old high slightly above the 360 area. That would give you about a 14% capital appreciation, plus the very nice yield.

The British gilts had a small reaction, but now are rallying again. This is remarkable in view of the series of interest rate hikes by the Bank of England.

The German government bond market is also sturdy.

And finally, the Shearson T-Bond Index shows a very powerful upmove over the last several years. There is no top in sight.

Conclusion: On a risk-reward basis, I have been saying since August that bonds offer the best opportunities. It appears that the big money has seen this also. I continue to recommend the zero-coupon T-bond funds which most major fund families have. I have been recommending the American Century Target 2020s and 2025 funds. They have gained between 17 and 19% respectively since August.

I continue to advise to avoid the international market. Some are worse than others, but none of them look attractive.

The Hong Kong stock market had a blowoff top in the July-August period this year. You can see on the chart where I predicted the Hong Kong market to crash. The blow-off was a typical fake-out upmove, which was used by the insiders to unload their stocks on the unsuspecting public.

The plunge since that time has been breathtaking. I continue to predict that over the next 1-2 years, office buildings in Hong Kong will empty out. There will be a real estate crash, which will lead to continued decline in Hong Kong's stock market, as over 70% of the market index is made up of property companies.

Japan does not look much better. The decline since my July 25 sell signal on Japan is like Niagara Falls. I believe that the 15,000 area will be penetrated to the downside, and that the low of 1995 in the 14,000 area will be approached. Thereafter, the market should have a reflex rally.

The German DAX index had a parabolic rise going into 1997. I showed this rise early in the summer, and suggested that it was unsustainable. So far, it looks like a long-term top. If definitely looks unattractive.

Of the European markets, only Madrid looks more attractive. There aren't any stock markets abroad where I would put money right now. Asia still looks dismal, Latin America looks dangerous although more positive, and Europe continues to have problems of excessive taxation and erroneous central bank policies.

On the other hand, in the U.S. we fortunately have a president who does not get involved in economic policy making. That is the best a country can have. Once the government starts making economic policies, things go haywire. The free market can do it much better. Possibly our president distracted by other problems. But whatever the reason for the lack of government interference, I love it. It makes the U.S. the best place to invest in the world.

International fund managers are depicted in the media as spending their lives in airplanes flying around the world a playing financial detective in their quest for good companies. But the charts of many of the funds they run are very similar, suggesting that they all invest in the same companies. Why not just get the quarterly report of a competitor fund, invest in those stocks, and save the plane and hotel expenses?

I don't know one who got out in anticipation of the recent debacle. Of course, feature stories say that “no one could have predicted it.” But we know better, don't we?

Do these analysts rely on the financial statements of the companies they visit? Most of those countries have no accounting standards. If “cooking the books” is possible public companies in the U.S., although infrequently, then it is probably the way of doing business in the emerging countries.

I spoke to one money manager who suspected phony financial statements of one company in which he was interested. He hired someone to count the number of trucks loading and unloading at the shipping docks of the firm. The results made the financial statements “suspicious.”

And then when you want to sell your stock holdings, where do you find the buyer? Many of those markets are so illiquid, you can only sell a stock by appointment.

Two months ago, one well known emerging markets analyst had turned bearish on Asia. In fact, he wisely suggested not going bargain hunting. But he also added that he considered India to be the only safe emerging country in which to invest. If we consider the India Growth Fund (closed-end) a proxy for the market, we can see that it has declined from over $14 in August to $8 recently. Not much safety there.

Conclusion: Internationally, the Asian markets continue to be disastrous, and are about as safe as walking in a minefield. Latin America looks a little bit better, but much too risky for my money, as I've been saying for many months.

Europe is potentially more interesting, but only for the fact that eventually the central banks will have to realize that they must lower interest rates in order to let their economies breathe. But that's still not enough reason to be invested there now.

That leaves the U.S. There are still some excellent opportunities here, but caution is warranted. This is the time to be defensive. And forget the high flyers, such as technology.

The best opportunity for conservative investors, on a risk-reward basis, is in the bond markets. Zero-coupon T-bond funds that I've been recommending offer you the leverage you need for some excellent capital gains. Since my recommendation in August, they are up as much as 19%.

We will participate in the year-end rally. Come January, we'll have to be increasingly cautious and be on the lookout for more trouble.

The U.S. stock market correction was amazingly brief. It was more of a shock produced by the unending turmoil in Asia, rather than a situation which would trigger a bear market. The rapid recovery in many of the indices, some of them even going to new record highs recently, shows that it was a correction, not the start of a bear market.

The bears got their two weeks of glory, which is nice. They deserve it. The bull market throws them a crumb or two about twice a year just to make sure that the bears survive. That's good for the bulls, because then they have someone to buy from.

The correction bottom on October 28 in the U.S. stock market was caught perfectly on our hotline of October 27, where I predicted that the next morning would see a big turnaround. The retest of the lows on November 13 was also caught perfectly on our service of November 12. This year, we've caught some tops and bottoms to the exact day, and others within one or two days. Only technical analysis can achieve such precision.

However, 1998 will not be as easy as the last two and a half years. I've often said that a bear market cannot start without a tight monetary policy. The Fed, in keeping the Fed fund's rate at 5.5%, is keeping money tight. Money supply growth, however, shows that so far it is not affecting the economy. If and when money supply growth starts leveling off, it will be a warning sign that the economy is stumbling. But before that time, hopefully the Fed will follow market interest rates downward.

December, 1997 Bert Dohmen

Dohmen Capital Research Institute, Inc.

A Division of Dohmen Capital Group

66 Queen Street, Suite 3801, Honolulu, Hawaii

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