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Which would you prefer: an annual salary of $1,000,000 or a starting weekly salary of a cent that doubles ever week during the year? If you picked the first option then please sit down with a pencil and paper and do the computation doubling the one cent 52 times: 1, 2, 4, 8, 16, 32 etc. The result is over $45 trillion. A 5% move in the DJIA is easily a doubling of you money in the futures, derivatives or options market. There are many trading system that work well in a trending market and there are many systems that work well in a trading range market. There has never been a system, however, which consistently signals when the market will change from trending to trading range or when the direction of the trend will change. If there were then trading it would, in theory, result in over $45 trillion of profits in short order for anyone with the mental balance to do the trading in real time. For obvious reasons, that can not be. The market rules and the very nature of the market itself would change first.
For reasons explained in Report #7, we believe that the direction of the trend has changed to the downside and we expect the new trend to continue for years. If we are correct, then using a trending market trading system, such as moving averages, to trade only on the down side, will produce superior results over the period the down trend continues. In addition, you may limit your risk in trading a bear market by short selling stocks which over time can be expected to go to zero. This is easier then it sounds. For a company to be successful it must do at least 20 things correctly. Doing any one of the 20 things incorrectly will sink. The underlying business of the companies will fail. We confess that Microsoft is not in that category. It has been used as an example because it has been the market leader and so presents a potentially gratifying challenge to our ego. That is not sound investment management.
We do not think that this bear market will end with only a 20% drop. Expect closer to an 80% drop to 1,882. This will not happen in a day, week or month. The bear market should continue for years. This bear market will need to correct all of the excesses from the 1982 low. It is unlikely that this bear market will end before we see a complete reorganisation of the world monetary system. (see Report #7) There will be many rallies in this bear market. They should all be used to sell short. (see Report #8) With the recent drop in long term rates we now have an inverted yield curve. That is one of the most reliable indications of monetary tightness. It is also one of the most widely watched indicators. Some commentators have suggested that this is an indication that the market expects inflationary times ahead. We agree.
Success in market timing requires that you be able to step aside from the crowd, think laterally, and correctly gauge the supply demand equation for stocks. The fundamental macro economic indicator is credit expansion and contraction. You must understand where in the credit cycle we are. In our view, we are in the contraction phase which must correct all the nonsense since the 1982 low. We called, so far successfully, the top in the stock market prices on the 17th of July 1998 (see Report # 7) because we successfully counted a fifth wave of the fifth wave completion at that time from the 1982 low. This involved, in part, Elliot Wave analysis which seeks to measure and categorize the human emotional response to the facts as they are recorded on a price time bar chart for share prices. All value is subjective. This is the one core fundamental truth that must be understood if you are to be a competent economist. Wealth and economic cycles are not the result of scientific advances. They are the result of the subjective response of human beings to physical reality. That response is subjective and emotional and it does have certain predictable patterns. If you understand those patterns then you can have a leg up on predicting future economic events, including stock prices. If all value is subjective, it follows that the potential for human progress and economic well-being is infinite. All of the doomsday prognosticators who predict that the world will end or the economy of the world will collapse because we are running out of oil or that global warming will irreparably harm the economy have made the same mistake that stone aged man made when bowing to idols made of stone to plead for protection from lightening storms. The cause of all things physical lies in a dimension beyond and not in the physical realm. All value is subjective and human beings have the ability to connect to an infinite source. The realization of that infinite potential in the economic realm is what businessmen and women do. As that realization unfolds in the objective realm, it is reflected in cycles of credit expansion and contraction and ultimately, the fluctuations of the price of MSFT shares as shown on its bar chart.
We are saddened by the attitude of many investors who have let the bear market destroy their wealth with the refrain: "I do not care about recent volatility, I am in it for the long term." In the long term we are all dead. If you want to die rich, you need to learn how to sell short in a bear market. We do not see gloom or doom. We see 100% plus profits per year for the next 3 to 5 years at a minimum. We and anyone who has followed our short trades as reported in the premium section have been making substantially better then 100% per year. We set forth our view of where we were in the long term cycle and that it was not yet time to short sell in the Report of Jan. 1, 1998. On July 16, 1998, we announced that we had started to sell short. This gave our clients and readers two trading days, while the DJIA was above 9,300 to go short and get out of any remaining long positions. Positive action which protects investor wealth and offers an opportunity to make substantially better then 100% per year is not our idea of doom and gloom, negativity, short-sighted self interest or bad karma. Moreover short selling need not be risky. Properly organising your short selling will result in substantially less risk to your financial health then being long.
