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THE REAPER
P.O. Box 84901, Phoenix, Arizona
(August 14, 1997) STOCK INDICES: Both the DJIA and the S&P made minor highs on August 8. The Dow needs to close on wide range and heavy volume below 7,775, December S&P below 900, for the intermediate down trend to be established. The overvalued dollar is also severely damaging Central and South American economies which are dollar-based. When former Federal Reserve Chairman Paul Volcker warns that the stock market can't grow to the sky, it's time to be cautious. Cycles and turning points have turned bearish, too. Monitor around September 1, a time of an eclipse, and coincidental with my precious metals turning points. Insiders have been selling stocks heavily. They are obviously concerned. An establishment voice, Robert Farrell at Merrill Lynch, has warned that a stock market high should occur by year-end and a bear market follow in 1998. The Dow/gold ratio is way out of whack. In 1980, the Dow bought one, one-ounce gold coin. Today the Dow buys 21 one-ounce gold coins. That's due to reverse. The Dow is only yielding 1.63%. Bill Gates' Microsoft stock being worth more than General Motor's ($40 billion) is extreme. U.S. companies valued at record high ratios to their average annual after tax profits for the past five years, 35 times pre-tax profits, is a record. Stocks as a percentage of household assets in 1989 were only 26.3%, now are 40.4%, with households owning 55% of mutual funds. In 1990, the value of stocks and stock mutual funds held by investor's was $2.2 trillion, now $6.2 trillion. That's excessive. It has been fear of the Social Security bankruptcy that has forced the Baby Boomers to save, coupled with a technological revolution, that has primarily boosted the stock market. Yet investors put $23 billion in stock mutual funds in July, primarily in the growth stock funds, international funds, and stock index funds as well as blue chip funds and aggressive small company funds. Until we see 30 days of net redemptions, the stock market could be supported. For only the third time in history, the stock market has been up more than 20% in two months. The other two times were off of important bottoms. This, however, is a blow-off. We are now in the second half of the year when the stock market typically falls. When Newsweek puts on its cover, “How the Roaring 90s Are Making Instant Billionaires,” we know we are very close to a significant contrary opinion turning point top in stocks. We are seeing the worst put-to-call ratio in a decade. That's a contrary opinion signal. The Dow is losing upside momentum. My work indicates that July 21 was a key time for momentum shift. Advancing months for the Dow are at an extreme. Margin debt is at a record $113.4 billion, with margin accounts between April and June rising 15%, the biggest two-month gain since 1987. The percentage of bullish stocks on the NYSE that have buy signals are 74%, the highest percentage rating since July, 1989. Stocks over the 30-week moving average were over 80%, the highest number since September 1991. These are all warning signals. With these caveats, here are the stocks that have grabbed my attention for possible investment. They come from all the reading and analysis I do. To short the stock market, consider the Rydex Ursa Fund as well as LEAP puts on the S&P. Additionally, precious metals stocks and bonds could outperform the stock market generally over the next 12-18 months. Technically, all stock funds are bullish except for precious metals. Contrary opinion?
RECOMMENDATION–For up to the 10% of the long-term investor's portfolio invested in the speculative stocks discussed in this section of the Reaper, investors who desire to hedge against a bear market in stocks may hold positions in Rydex Ursa Fund, which is now 10% of the long-term investor's portfolio. Or, cautious investors may hedge stocks by purchasing and holding the likes of LEAP puts on the S&P 500, such as the December 1998 55 and 65 puts. High risk speculations for a bear market in stocks are the purchase of put options in the December S&P futures contract. Stock market investment in our natural resources funds, real estate funds, and gold funds are performing nicely.
R.E. McMaster, Jr.
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