THE REAPER

P. O. Box 84901, Phoenix, Arizona

(October 9, 1997) STOCK INDICES: Stock index futures are overbought technically and psychologically. December S&P must close below 900 to issue an intermediate sell signal, the DJIA below 7600 to confirm an intermediate sell signal. Until then, the uptrend deserves the benefit of the doubt even though technical signs of distribution are evident. For example, insider selling has been heavy. That's bearish for 1998. Specialist short sales have climbed above short sales by the public for the first time in three years. That's negative. Three bearish economic commodities–lumber, copper, and cotton–suggest the economy is slowing, as do warnings from consumer stocks that earnings will fall short of expectations. Consumer spending/borrowing is 70% of the economy, and a bear market in stocks will wipe out what consumers consider to be their “savings.”

Also of concern is the fact that small traders hold the most S&P futures contracts on the long side ever. Moreover, new investors have been jumping into the U.S. stock market at the rate of 300,000 a week for the past 16 weeks. That means 45% of U.S. households are in stocks, twice as many as in 1929 and the highest total ever. The fact that the DJIA began trading as a futures contract with options as well on October 6 means that the highly leveraged futures casino play in paper assets is now complete. Given all of this, our natural resource stocks, REITs, oil stocks, utilities, and mining stocks have performed beautifully. If the precious metals continue to move higher, so should mining stocks. The XAU closing above 103 is bullish.

RECOMMENDATION–Up to 10% in the Long-Term Investor's Portfolio is invested in the speculative stocks discussed in each issue of this section of the Reaper, including utilities, oil stocks, REITs, and natural resource stocks. Another 10% is invested in mining stocks. Investors who have hedged against a bear market in stocks generally hold a 10% position in the Rydex Ursa Fund. Cautious and speculative investors have also hedged stocks by purchasing and holding LEAP puts on the S&P, such as the December 1998 55 and 65 puts. High-risk speculators who expect a bear market in stocks before year-end have purchased put options in the December S&P futures contracts.

R. E. McMaster, Jr.

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