If you pull up a chart showing the last 10 years trading in the S&P 500, you will see something startling.  The S&P 500 double topped in October 2007.  The S&P put in a high in March 2000 at 1,553 and then retreated to 768 in October 2002.  There was then a nice bull phase, taking prices back to 1,567 in October 2007.  That rally was followed by a decline, taking the average back to 1,200 in mid July of this year. 

The important observation is the double top completed in October 2007.  This has all the hallmarks of the onset of a long term secular bear market; and I, for one, believe we are in that bear market now.

We have been heavily involved with committing our investment money to commodity -related positions, and these have proven to be more valuable than even participating in the 2002 – 2007 bull run in financials.  Tangibles (commodities) far outpaced the stock market during those years.

There will be bear market rallies, although not as dynamic as the 2002-07 experience.  The S&P 500 at 1,300 sells at a P/E of 25.  There is going to be a severe adjustment because 25 is a multiple seen at market highs, and there is little doubt that S&P 500 earnings are going to decline drastically over the next few years.  Mounting national credit problems in both the private and public sectors virtually ensure lower earnings.

Bottom line, the commodity bull has at least 5 to 7 years ahead of it yet.  The stock market is going to take it on the chin, but it will be a trader’s dream.  I see a long term, wide trading range setting in.  The S&P 500 is not going to go to zero, but it will visit those 2002 lows just shy of 800.  On the other hand, the best you can expect is a trip from there back to 1,500 again. 

The current perspective on this is important.  The S&P 500 is much closer to 1,500 than it is to 800.  Furthermore, September and October are typically very unfriendly to the stock market.

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Our short term indicators are improving, but our long term work remains decidedly bearish.  I have summer rally upside targets of 1,300 for the S&P 500 and 2,300 for the Nasdaq Composite, but these are not far over current prices.

There is always the possibility that we will see some improvement in these objectives, but that may well be pitting hope against hope.  My conclusion at this time has to be that, yes, there will be a summer rally off the July lows … but it doesn’t’ look like it will get all that far, and it certainly will not be sustainable.

If you are a long term, buy-and-hold type of investor, you need to use strength to liquidate financial (paper) related assets.  Although the bull market in tangibles (commodities) has been correcting of late, this only serves to offer up new opportunities in hard assets like crude oil, coal, and precious metals.  Over the next 12 months, stocks that are advantaged by higher commodity prices will continue to advance while the popular averages and all they represent will falter.  Invest accordingly.          

A second approach is to adopt a short term trading program.  You can trade your way to profits, even in a bear market.  Our new Phase Advantaged Trading Program is designed for those interested in adopting a trading strategy.  This is a separate service from our regular letter.  It is appropriate for those who are disciplined enough to follow daily trading instructions.  There will be a lot of trades, but the approach is conservative with no wild, high risk moves.  If you have an interest in further details, send me an e-mail to info@protiming.com requesting information on Phase Advantaged Trading.        

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The stock market is going to be severely range bound for the next 7 to 10 years.  I see the S&P 500 trading between 1,600 on the extreme upper end to 800 on the lower end.  Over the next several years, I expect to see the averages move from the upper end to the lower end of their respective trading ranges, and back again.  The net result for the average buy-and-hold investment will be to break even, at best. 

It will take a long time for investors in the S&P 500 at today’s level of 1,375 to show a nominal profit and make enough to beat inflation.  In fact, with the average closer to the top of its trading range than the bottom, the potential for some serious losses exist.

There are two ways to beat this problem.  One is to invest in commodity-advantaged assets only.  Commodities are into a mega bull market that is long from over.  As the S&P 500 shows little or negative gains, commodities will be moving ever higher.  We cover select stocks that fit the bill, including those advantaged by higher energy and precious metal prices.

The second way to exploit a market caught in a wide trading range is to take a trading approach.  We are just introducing a new service called the Phase Advantaged Trading Program for those interesting in adopting a trading strategy.  This is a separate service from our regular letter.  It is appropriate for those who are disciplined enough to follow daily trading instructions.  There will be a lot of trades, but the approach is conservative with no wild, high risk moves.  For the last 12 months, our real time account has gained 28%.  If you have an interest in further details, send me an e-mail requesting information on Phase Advantaged Trading to info@protiming.com.  

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The stock market is looking more bearish each day.  I see the S&P falling to 1,200, and then to 1,000, over the next few years.  There is a recession developing, and S&P earnings are going to come in well under what is expected.  There is going to be an adjustment, and the Nasdaq will suffer more than most.

Inflation is heating up; and while stocks are going sour, the commodity market is beginning to soar.  Most commodity indexes are at new highs, and the commodity bull is just getting warmed up.  The stock market does not do well when inflation is accelerating, and the popular averages are all destined to visit their 2002 lows before the carnage is over.

What to do?  Being invested in the right asset class is 85% of investment success.  The right asset class is real assets; i.e., commodities or tangibles. Make sure your investments are focused on tangible assets and those stocks that are advantaged by higher commodity prices.  These would preferably be in gold and silver mining companies and oil … but not just any oil.  Crude oil producers stand to gain nothing as their reserves play out.  What good is $165 oil if you don’t have any to sell?  In fact, there is only one major producer that is worth owning, and that is due to their proprietary technologies and unique ability to exploit mature and played-out fields like no one else.

Nevertheless, exploration and drilling activity will continue to grow.  Oil services will be in greater demand.  Transportation will be more expensive and more profitable.  Refiners that can process sour crude will see their margins widen handsomely. 

What to do?  Use strength to liquidate financial assets.  Get the heck out of the stock market, or at least out of anything not advantaged by higher commodity prices.  Buy precious metals and buy oil … but not just any oil. 

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The stock market looks like a bear to me, and I have seen my share of bear markets.  It is interesting that the S&P 500 topped out in 2,000 just under 1,600.  It dropped to about 800 in 2002 and recovered to just under 1,600 (1,576) on October 10, 2007.  That just might be the mother of double tops.

Regardless of what the government reports, inflation is heating up, and that is not good for the stock market longer term.  If you are looking for a model to follow, think 1973-1974 stagflation.  The economy is going to wallow, inflation is going to become a problem, and the stock market is going to visit its 2002 lows.

Nevertheless, a short term rally is not out of the question.  The market is oversold and is definitely in panic mode.  These are ingredients that set up trading opportunities, and we have trading models specifically designed to guide readers through these short term swings.  This may well be a very dangerous rally.  Typically when the market puts in a long term high, prices will fall and then stage a spectacular rally.  This “recovery” draws in a lot of novices, but it quickly fails.  The rally will be a trap - a hook, if you will - and it best be avoided.

Use strength to liquidate financial assets.  The only paper assets that you should own on a long term basis are those advantaged by higher commodity prices.  We are in a commodity bull, and those are always accompanied by bear markets in financial assets.

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Rock and roll.  How can the market get more jumpy?  The problem is in the perception of calm that the stock market has fostered over the last few years.  The market is only getting back to its normal ways. 

Volatility will be the norm now, and there is a way to exploit that instability.  It is time once again to approach the market from a trading standpoint and use ETFs and mutual funds as your trading vehicle. 

Last June, we introduced a new trading model called Palio.  On buy signals, the model exchanges 50% into the Rydex Nova Fund and 50% into the Rydex OTC Fund.  On sells, the program exchanges 100% back into the Rydex Money Market Fund.  Using the Rydex funds directly at Rydex eliminates any transaction costs or fees - the exchanges are free.  You could use other funds and appropriate ETFs as well, but the program specifically addresses the Rydex funds.

So far, the year has been profitable, and Palio recently moved back in to the equity funds.  It may be signaling the beginning of the year-end rally.  Nevertheless, the model has handled risk very well, both in back testing and in real time.

Bottom line, the stock market is going to be more volatile in 2008, but a good, objective trading approach to financial assets should prove rewarding.  

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The key word I have been using to describe the stock market has been “vulnerable.”  We saw this in action during August when the Dow managed to drop just over 11% on an intraday basis over the span of 19 trading days.  October - the worst month of the year for stock performance - is now upon us.  Since testing the August highs on October 12, the Dow has retreated some 4.5%.   Nearly half of that drop was on the 19^th alone, and there may well be more to come.  The drop on the 19^th was enough to put our foremost broad market timing model, Palio, on the defensive.  It will never catch the exact high, but this sell may be of more than average importance.

The stock market will remain “vulnerable” for some time to come.  In 2000, the Dow/gold ratio topped out and began to head down.  This indicated the end of the great bull market in stocks that began in 1982 and the beginning of the great bull market in tangibles.  Ever since the ratio topped out, tangibles (commodity-advantaged investments) have outperformed paper assets as represented by the Dow.  This will continue, and the popular stock market averages will remain “vulnerable” until the Dow/gold ratio falls under 5 (currently, it’s 17.5 and falling).  Be certain that until then, you concentrate your investments in tangible assets and those stocks that are advantaged by higher commodity prices.

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I have been warning for months now that the stock market was vulnerable to some downside surprises.  August gave investors a real time look at that vulnerability.  The averages are still “vulnerable” - especially as we progress through September (which is not a particularly friendly month to the bulls) and into October, which is known for the worst crashes of all time. 

The biggest recent development is the increase in volatility.  Overnight, the market has gone from several years of benign volatility to mind-numbing, day-to-day movements, both up and down.  Volatility is a two-edged sword, remember; and we have see this full well.  Huge down days are followed by equally huge up days, only to fall hard again a day or two later.

This is all about added risk, and the market is going to factor increased investment risk into prices.  The odds are good that we will see the averages revisit their August lows by the end of October.  You need to be prepared for that.  What will emerge from all of this turmoil?  I think 2008 will see the commodity-related issues disconnect from the general market averages and rise on their own while the Dow, S&P 500, and Nasdaq will languish.

The game plan for 2008 is to invest in tangible assets and those issues that are advantaged by higher commodity prices.  Financial (paper) assets should be avoided.    

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I have a cartoon by Pat Oliphant of the Washington Post hanging in my office.  It shows a huge bull, dead on the ground, in the bull fight arena.  There is a big bear about to enter.  The matador is kneeling.  The caption reads:  “I don’t understand – we were having such fun.”  The little characters in the bottom corner are saying: “Perhaps he’ll rally.”

The stock market of late fits this picture of the past so well, as will future markets.  Perhaps the market will rally.  I suspect it will, as there is often a “hook rally” just after the first break that seduces the crowd.  It convinces them that the damage was temporary and that a buying opportunity is at hand.

My opinion, which I have ventured repeatedly over the last few months, is that the market is “vulnerable.”  Perhaps it will rally, but it will still be “vulnerable.”

As the commodity market began to develop in late 1999, we shifted our strategy to investing in tangibles and only financial assets that are advantaged by higher commodity prices.  I think this strategy remains prudent.

The stock market is becoming more volatile, and selloffs will be more dynamic than in the past.  This means that selling will be more intense, and stock market declines will tend to draw all stocks down in concert.  The difference is that financial assets are going to continue to get hurt while tangible assets will recover and thrive. 

Use weakness in commodity-related stocks brought about by general market weakness as buying opportunities.  As the dollar decays, commodity prices will rise.  U.S. domestic demand weakness will be easily made up for by growth in Asia.  China alone will demand more raw materials in the next 10 years than can be produced. 

We are entering the second phase of this commodity bull market - and likely, we are at the beginning of the next bear market in financial assets.  Both the commodity bull and financial bear promise to become stronger.  You should invest accordingly.

There are negative divergences cropping up all over the place.  The Nasdaq Composite looks like it may be putting in a double top.  We are in the worst six-month period for stock market performance; and regardless of whether the stock market averages move higher or not, the risk here is extreme.  You can make money in a risky environment, but not by investing complacently.

You will hear how the weak dollar is going to help our exports, but then you have to ask what it is that we export and how much more a weak dollar will raise the cost of our imports.  Which is more significant - what we spend on oil or what they spend on Hollywood movies? 

We have a trading model I call the Nasdaq Slow Tracker.  It is designed to avoid being overly aggressive, which also impairs its sensitivity somewhat.  All in all, this model offers some solid guidance.  It has been on a buy signal since April 20; and to date, it has not issued a sell.  With the divergences I am seeing and other technical factors pointing to cracks in the stock market’s foundations, the next Slow Tracker signal may be more significant than most.  The next sell will occur if the Nasdaq Composite trades at 2,534 or less.  The trigger point is close to being adjusted, though, and when a new sell point forms, it will be announced to subscribers in our twice weekly updates

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I suppose when the market has been rising for several months with historic strings of up days, it has to be a bull.  If not, it is certainly an energizer bunny.  It just keeps going on strong, and the occasional big down days are, so far, singular with quick recoveries. 

For some time, I have been working on a new timing model that we can use to time stock market index funds and ETF’s.  It is called Palio, and I am going to introduce it in the June letter.  Suffice to say, the current stock market defies fundamentals - consumer spending tanks while consumer borrowing accelerates, sub-prime loans troubles worsen, etc.  What are stock market investors thinking?

It doesn’t really matter as long as we have technical tools to cut through the fog and inconsistencies.  Palio is designed to do that for us.

Currently, Palio is long – on a buy signal.  The next important event will be when it issues a sell.  I will, of course, announce the signal to our subscribers immediately when it occurs At this point, it is not threatening to issue a sell.  It likely won’t do that as early as next week, but things change quickly in the market, and it is not our job to forecast our models.  When the Palio sell comes, it will be time to buckle up, tighten up sell stops, and do some serious selling. 

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Not counting a rude interruption - panic, meltdown, or whatever you want to call that dip we saw last February - the popular averages have been rising for 8 months now.   Nevertheless, I keep getting that old deja vu feeling.  It is a little like the feeling you get when you look over the edge of Hoover Dam. 

It is uncomfortable for several reasons.  One is that the dollar is getting taken to the wood shed and shot.  The U.S. Dollar Index is closing in on its all-time low, yet stocks seem to continue to rise.  Foreign governments are beginning to devise ways to “diversify out of the dollar” and take other currencies, like euros. 

Statistically, the S&P 500 is slated for a downside adjustment in earnings.  Considering the housing problem, problem loans, and associated consumer spending fallout, that is not hard to imagine. 

My technical work continues to bring up negative divergences, and the latest highs have all the earmarks of double tops in the making.  As April ends, the stock market enters its statistically worst six months of the year, yet the Street is bullish.

The reason I get dizzy looking over the edge of Hoover Dam is because I recognize the risk that the scene represents.  However, even with the wake up call this February - when stock prices swooned in the matter of a few days - the public doesn’t seem to recognize any risk at all.

Time will tell if we are about to see a double top form in the averages.  Regardless, the markets situation here looks “risky,” if not out right perilous.

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In my last indicator update, I talked about John Hussman and some interesting sell signals he was getting for the stock market.  Recently, I came across an article that referenced sell signals from Tom DeMark’s model called Sequential.  I am somewhat familiar with Sequential.  Tom is a top rate analyst, and you walk on thin ice if you ignore Sequential’s advice.

I have preached for some time now that you should not be in financial (paper) assets, with the exception of those advantaged by higher commodity prices.  I still feel that way.  The stock market, as measured by the popular averages, is poised to resume the bear market that began in March 2000.  The 400-point drop in the Dow Industrials - and nearly 100 points trimmed off the Nasdaq on February 27 - is but a preview of what lies ahead.

Normally, when the market turns, there will be trading gaps left.  There will be a subsequent rally where prices will attempt to move to new highs once again, but will only be able to trade into the gap.  The Street will get all excited and proclaim that the panic was but a short term phenomenon and a needed breather.  I call it the “last ditch rally,” and it will suck in the crowd.  Beware of the last ditch rally.  Don’t be seduced by the Street as it whoops buyers for the pros to sell their positions to.

The market is at least due for an extended drubbing.  The commodity market and related issues will recover, but financial (paper) assets will continue to suffer.  I advise you to invest accordingly.   

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John Hussman, www.hussmanfunds.com, is one of my favorite market technicians.  He recently talked about a stock market indicator he is fond of called “ovoboby” – overvalued, overbought, and over bullish.

He quantifies these conditions.  The overvalued condition exists when the peak earnings to price ratio for the S&P 500 is over 18.  He considers the market overbought when the S&P 500 is at a four-year high and is at least 5% higher than six months prior.   He considers the market over bullish (too many believers) when the Investor’s Intelligence percentage of bullish advisors is over 53%.

When all of these conditions exist simultaneously (as they do now), the market is due for a decline.  Bear in mind that all these conditions have been in place at the same time only 8 times in the past 40 years.

Normally, the market has advanced a few percentage points before declining after the ovoboby signal is in place, but the resulting declines have been quite sharp and have been at least 10% in magnitude.  Since the market has advanced longer than is typical without a 10% correction, it would appear that investors should be wary about election cycle bullishness, at least until we see the S&P 500 peal back to 1,290 or so.

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The bond market is forecasting a recession; and the stock market - if anything can be made of its rally over the last several months - is looking forward to a good economy.  So who is wrong - the bond traders or the stock investors?

Frankly, I think they are both wrong.  I see lower stock prices due to a decline in the growth in corporate earnings and a narrowing of profit margins in 2007.  I also expect higher inflation from a weaker dollar, which will, in turn, pressure margins.  It all translates to losses in both bonds and stocks.  That is, unless you are in the right stocks.  The right stocks are those that are commodity driven.

The year 2007 stacks up to be a shocker for investors in financial assets and a boon year for those investing in tangibles. 

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The stock market has surprised everyone.  It is not that it is in a strong rally.  It is creeping higher, but it certainly is anything but strong.  The media is all over the Dow Industrials making a new, all-time high; but the truth is, there are only 30 stocks in the average and 70% of them are well off their individual, all-time highs.  New highs in the Dow are due to tricks of mathematics … and what interesting illusions one can create with an “average!”

For example, consider – a decline one year of 50% and then an increase the next year of 100%.  The average can be calculated as -50% plus 100% divided by 2 years, or an annual gain of 25%.  In fact, if you lost 50% and then gained 100% from that point, you would only be even.  This is one reason the average rarely happens.

The S&P 500 average is not making new highs, and neither is the Nasdaq.  The Nasdaq, in fact, is still about 55% below its all-time high.  This average is quite representative of the situation most of the investing public are in.

All the hype about “new highs” in the “stock market” is intended to make voters feel good and help retain the Republican majority.  We shall see.  

I have cyclical highs due for the market soon; and October, although beginning on a good note and following a benign September, still has a reputation of serving up particularly nasty surprises.  Don’t get too comfortable.

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The stock market looks terrible here.  It has been a typical August in many respects.  We often see some sort of “summer rally” in August, which gets investors all excited and bullish.  This summer’s rally will not set any records, even though it was exciting in respect to the market’s disappointing performance during the last several months.

Typically, August strength is enough to draw in the crowd just in time for September and October to arrive.  I have never made any money to speak of in the market during September - we are talking stocks, as in financial assets, here.  Commodities and commodity-advantaged stocks, like gold and silver mining and energy production, are exceptions.  Outside of the commodity market, I have never made enough money in September to justify the risk.  Then comes October when all the past massacres have occurred (1987 most recently).

Over time, you would not have lost any money if you simply were out of the market during September and October.  Such a strategy would have kept you from losing a ton of money which you then would have had to make back while others who avoided the troubled months were adding to their wealth.

If you are long anything other than real assets or those assets driven by higher commodity prices, at least put close protective stops in place.

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The stock market is in big trouble.  This is not a surprise after our “worst six months sell signal” issued on May 12.  Since then, we have seen some spectacular days on the up side, but they have all turned into “one day wonders.”   They have been bull traps for those following the crowd’s brief, schizophrenic excitement. 

Our work continues to point to further downside erosion, at least between now and the end of October.  There is a lot of time left this year for the market to do some surprising damage.  I think the next three months will see some savage selloffs.

All the ships will fall with the tide to some extent, and we have seen this affect the performance of our energy issues.  Nevertheless, the energy stocks and other commodity-advantaged issues will come back while the financial investments won’t.  If you are buying stocks, be sure that your positions are advantaged by higher commodity prices.  The second era of slow economic activity, higher interest rates, and rising commodity prices is just getting underway, and it has at least another ten years to go.  

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On May 12, our work turned decidedly negative on the stock market, as measured by the popular averages. Since then, the market has taken a beating.  It has been enough of a beating to push the 10-day moving average of the NYSE TRIN over 150.  This is extremely oversold.

It tells us two things.  First, coming so soon after the highs, this market remains vulnerable in the longer term.  This is a bear market.  Second, this is oversold enough to produce a rally - even in a bear market.  We are going to see a bounce here.

I don’t expect to see it get very far since there is level after level of overhead resistance for the market to contend with.  The Nasdaq, for example, will encounter technical resistance at 2,150 and then again at 2,220.  There are levels above those, but I don’t expect to see that much progress. 

Look for the popular averages to struggle higher until after the 4^th of July and then resume their downward march.  I expect to see the S&P 500 at 770 and the Nasdaq at 1,100 - possibly within the next six months. 

Downside projections really don’t matter.  What matters is that the only stocks that will survive and prosper in the coming six months will be those advantaged by higher commodity prices. 

How can we have a recession and higher inflation and commodity prices?  Just refer to the 1970’s.  It is really quite easy when raw materials are scarce and the Fed is desperately trying to keep the banks above water.

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On May 12, MACD (Moving Average Convergence Divergence) issued a sell on the S&P 500.  Our Nasdaq Slow Tracker has been on a sell since May 1.  The worst six months of the year began on May 1 as well.  The message is that the stock market is now very vulnerable; and with the exception of holding commodity-related issues, the odds of losing money over the next six months are very high.

Our recommendation was to use strength earlier this year to raise cash.  Energy and precious metals will have corrections from time to time as the bull market in real assets continues.  I also expect that commodity-related issues will fall, at least initially, with the stock market averages.  As investors begin to panic and rush for liquidity, they tend to sell everything.  The baby goes out with the bath water.

Astute investors will use such weakness to accumulate commodity-related issues.  As the secular bear market in the stock market resumes, all the ships will initially fall with the tide.  The real asset based stocks will recover; the rest will not. 

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I suppose everything could go up in price.  Suppose we were sitting at the end of this year and found that bonds had made money, stocks had made money, and commodities had made money.  If that were to happen, the best money would be made in commodities.

However, we are not sitting at the end of the year.  We are sitting at the middle of March.  The risk in buying the popular averages is extreme in my estimation.  The problems are three. 

One is housing.  The housing market is weakening.  Prices may fall precipitously, or they may simply stall out for a long, long time.  In either event, the economic impact from filling the consumers’ wallets through refinancing, to employment in the housing industry and its related adjuncts, will be negative.  As consumer spending stalls out, so will corporate profits.  When the S&P 500 begins to miss earnings’ expectations, the market will fall.

The second problem in investing in the averages is the war/Middle East/deficit/dollar/energy/Iran problem.  Iran is a big problem, but all of these issues are related and intertwined.  All of these issues are also potentially bearish for the stock market, but not necessarily bearish for commodity prices that are expressed in U.S. dollars.

The third problem - that not many financial writers are talking about - is the bird flu.  The H5N2 virus is a potential threat of enormous proportions.  A pandemic on the scale of the flu pandemic of 1918 could kill 10% of the world’s population, and perhaps more.  It can also do this very fast.  In the 1918 flu plague, people would go to work in the morning feeling fine and be dead by supper.  Such an outbreak would shut down the world’s economies, and the resulting decrease in populations would set us into an economic dark age not seen since the 1930’s. 

I don’t give this as much weight as the problem in categories one and two.  Category one is sure fire.  It is going to happen.  Category 2 is simply a cauldron of fomenting troubles that are likely to get worse before getting better. 

Category three is simply a heads up.  We need to be ever aware of potential problems.  The positive thing here is that there is a massive recognition of this problem, and it is being tended to.  The flu cannot necessarily be prevented, but the effects can be contained. 

The best bet is to put your money in commodity-related investments.  Avoid financial investments like bonds and stocks that are not driven by commodity prices.  The popular averages have more potential on the down side than the up side.  Finally, keep a close watch on the bird flu and developments with this problem.     

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When I look over my technical work, the stock market jumps out and looks positively terrifying.  I was looking for a top in January that hasn’t appeared - but we will not really know that until the next down leg is in full force.  By then, it will be a little late to do anything. This game is best won by correct anticipations, not by latecomers buying the tops and selling the lows.

I am anticipating the market will turn surprisingly week in the next eight weeks.  I look for the averages to fall with no apparent reason.  The media will, of course, drag out the pundits, and there will be excuses.  There always are after the fact.  However, a market that falls for no good reason is the weakest of all. 

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I have forecast a high in the stock market for January 2006, but I have to say the cyclical bull that began in October 2002 is not giving up easily.  After a remarkably flat year during 2005, the averages have been trying to come alive as the new year begins. 

I now look for this death struggle to last until May.  The lifeblood here is an acceleration of money supply growth by the Fed.  Since mid-November, M2 has been on a tear.  This increase in liquidity will find its way into equities, be that right or wrong for investors in the long run.

The real bull market is in commodities, and that bull has at least five years to go yet. The stock market, as measured by the popular averages, is still in the secular bear that began in 2000.  Likely, we will see the averages trading within a wide trading range until the commodity bull is over. 

Bottom line, you can trade the averages and individual stocks if you like, but investment money should only be in stocks that are advantaged by higher commodity prices.  Examples are Canadian energy trusts and precious metal mining companies.

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STOCKS/AVERAGES

It is time to get out of the stock market.  I advised readers in October to plan on using year-end strength to liquidate portfolios.  The only stocks that should be held are those driven by higher commodity prices.  The commodity bull is alive and healthy, and it’s getting stronger.  The stock market secular bear was given a reprieve with a cyclical bull market off the lows in October 2002.  That gentle refreshment is about to end.

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The trading rally we advised readers to expect from October lows is now underway.  However, all of the averages are running into overhead resistance levels, and our oscillators are quite overbought.

The most interesting is the 10-day moving average of the Arms Index, or TRIN.  The most recent reading was 87.  Readings of 85 or lower will presage declines, even in a bull market.  We aren’t that overbought yet, but we are close.

My advice remains unchanged.  Invest only in financial assets that are advantaged by higher commodity prices.  Use year-end strength to sell out of all other financials.  You should be concentrating your money on tangibles.

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October is usually an ugly month for stock investors, and this October will be no different.  In August, I warned subscribers that they should expect a resumption of the secular bear market that originally began in March 2000 when the Nasdaq topped out at 5,000.  There was a cyclical interruption from the lows in October 2003, but that cyclical bull market is over.

Commodity driven investments are still the place for your money, although you have to realize that prices cycle from high to low, and you need to take advantage of the lows when making your purchases.  Don’t chase strength, and be patient.  Prices will come to you.

I want to reiterate my August warning that we could see a period that is best described as a liquidity panic.  If the market decline accelerates and traders and investors begin to rush to cash, a panic will often ensue.  These panics are most typical during October for some reason, so buckle up.  I suggest retaining stocks on our long term buy-and-hold list, but have some money set aside to add to your positions as weakness intensifies during October. 

There need be no guessing.  Our long term buy-and-hold list includes specific downside buy prices for each of our issues where investors should make their purchases.

For October, look for weakness - perhaps a panic - but use that weakness to purchase selected commodity driven stocks.

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The stock market is entering a time frame when all of the worst crashes have occurred in the past.  Energy prices are soaring; and although many believe this is a temporary problem, I believe it is permanent.  We may look back at $3.00 gasoline, $60.00 crude, and $12.00 natural gas as the good old days.  High energy will eventually sink the stock market.  It is simply a matter of how prices correct.

The averages may well sell off in an orderly manner, but that would be unprecedented.  My expectation is for selling to gather momentum as more investors realize how serious the current energy situation is and how long it will take to address it.

All ships will fall with the tide, but there is a difference between stocks that are advantaged by higher commodity prices and those that are not.  Commodity-advantaged stocks will quickly recover, but the others will not.  This is an excellent time to cull through your portfolios and sell anything that does not benefit from rising commodity prices.

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The stock market has been surprisingly resilient of late.  I still believe that we will see the return of the secular bear that began in 2000 by the end of August.  However, for now the summer rally continues.

At this point, the averages are nudging old highs, which is always a warning from a trading stand point.  Old highs are difficult to surpass, and our current market is overbought.  My guess is that we back off from July highs, and then test those highs briefly in August before prices turn down for the balance of the year.

I have been working on a new timing model for the averages, and will be describing more about it in future market letters.  It is still in the testing phase if you will, but suffice to say that currently the model is long.  When a sell develops we will pass it along to our readers.

There are a lot of investors with a lot riding on the S&P, but our energy investments have done so much better.  I don’t believe the ultimate top is in yet for these generous dividend payers, and regardless of where the Dow or S&P ends up down the road, higher or lower, our energy positions will beat the averages hands down.

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My studies of the long cycle in the stock market - along with other indicators that I like to watch like my Annual Asset Allocation Model and the Q-ratio-  tell us that we are coming to the end of a cyclical bull market that began in October 2002.  The Nasdaq has already put in its high last December; and recently, we have been witnessing a hook rally.  See Recent Remarks.

The risk overhanging the popular averages is enormous, and it’s growing with each point of advance.  The resolution is not going to be pretty, but it likely will not be tomorrow either.  I have highs coming up on my charts in early July, and also in August.  This may indicate that we churn through the summer as the professionals use strength to liquidate what they haven’t already sold.

If anything exogenous were to occur  - like a surprise in the bond market, or a spike in oil prices, or sudden foreign selling in the dollar, or another terrorist attack, or something we haven’t thought of (who expected the 9/11 attack on the twin towers) - the market will collapse.  Ultimately, the market is doomed by a wide array of problems, none the least of which is the rising price of crude.  We are a long ways from a top there.

Stock investors should stick with only stocks that are advantaged by rising commodity prices.  These will beat the bear. 

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This is the last favorable month for the stock market.  Virtually all of the stock market’s profits have been generated during the months of November to April.  Virtually all of the losses have been suffered during the months of May to October.  That is just the way it is.  You can learn more about the favorable versus unfavorable six-month periods in The Stock Trader’s Almanac, www.stocktradersalmanac.com.

It is also interesting and relevant that nearly all of the stock market’s most devastating crashes have occurred in October.  Octobers during odd numbered years seem to have suffered worse calamities than even year Octobers.

So, as we embark into the worst six-month period for 2005 and face the prospects of a worse than usual October this fall, the risk of holding stocks and mutual funds far outweighs the potential rewards.  The exception is investment in stocks or mutual funds that benefit from higher prices of tangible assets. 

Precious metal mining companies and mutual funds, energy royalty trusts, etc., will do well in the increasingly inflationary world we see coming down the road.  All but one of the precious metal stocks on our buy-and-hold list hit their respective downside buy prices over the last two weeks, and they look poised for the next rally. 

We have also released most of our energy stocks from previous hold recommendations, and we are encouraging investors to use weakness to make additional purchases.  Like the metals, energy is completing a bull market correction.  The next surprises will be on the up side.

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This chart of the weekly Value Line Arithmetic Average is disturbing.  That certainly looks like a classic double top to me.  The S&P 500 looks similar.

You have to realize that the stock market does not reflect the economy; at least not the current state of the economy.  The stock market is an indicator of the future.  The stock market discounts and anticipates the future.  The stock market is as close to a crystal ball of the future of the economy as you will find.

Today’s stock market may appear to be undecided, but it is actually in the process of distribution.  That is when the big kids the pros use strength to liquidate positions.  The will sell into strength but patiently.  They will be very careful not to do too much damage in a selling spree.  Once prices begin to weaken enough to spook the masses, they back off and let the crowd move prices higher again.  The result is a stock market that to the casual observer can’t seem to make up its mind; up one day and down the next.

However, those attuned to technical analysis will see the warning signs.  Of late daily new highs and new lows are flashing bright yellow caution signs.  As the daily new highs shrink, daily new lows subtly are increasing.  The process is gradual as not to cause a panic, but it is present none the less.

Another interesting phenomenon, which you will often see at times like this is extreme oversold readings very close to market highs.  Bull markets very seldom get this oversold and then only after a prolonged correction.  On the other hand bear markets get very oversold and tend to stay there.

The most important thing to do is focus your stock investments on commodity (tangible asset) based stocks if you are going to own stocks.  My preference is to concentrate on a select group of energy producers and precious metal stocks listed in our buy and hold list of recommendations. 

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The stock market seems to want to rally here; but every time it starts to get something going, it fails immediately.  It seems to be a boom shuffle affair; but likely, it can persist a while longer.

The real problem I see is that the Nasdaq  - and especially the Nasdaq 100, which represents the big guys in the Nasdaq - is lagging woefully behind the rest of the market.  I started trading and investing in the stock market in 1964.  Since then, I have successfully navigated several bear and bull markets. 

If there is one element that I have observed which screams trouble ahead, it is the small caps lagging the generals.  When the generals - as in General Motors and General Electric and General Mills - all lead the charge and the troops - the up and comers - fail to follow, the generals always turn and follow the masses.

The market may well work its way a bit higher, but the Nasdaq will not come anywhere near its high of 5,000.  The most likely outcome is that all the averages will fall below their 2002 lows some time this year.

Be prepared.  Being in the right sector is 85% of the game, and the right sectors are energy and precious metals.  

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You might want to read the comments I have under the Bond Model Indicator concerning the yield curve.  Aside from an inverted yield curve, the stock market still looks vulnerable.

Santa Clause failed to call.  Normally, the market will appreciate during the last four days in December and the first two days of the new year.  This year was a loser, and that pattern will often presage a bear market.  Optimists turned their attention to the first week of the year.  It is said that the market’s behavior during the first week of January will forecast the year.  However, all we got was another evil omen.  The first week was a loser.

PE multiples are still too high to justify the stock market as a bargain.  The S&P sports an earnings multiple of 29.  That is more likely to appear at a high than a low.  The S&P will sell for 10 times earnings or less at the next bear market low, and no one will be interested in buying.  Stock market investors should keep their investments directed at commodity-related investments, especially if you are not of a mind to be a trader.

From a trading standpoint, the McClellan oscillator recently hit –200.  Such extremely oversold levels are normally followed by trading rallies, and we may well see something develop here.  If the S&P can manage to take a run at 1,230, it would be a good time for you to cull through your portfolios and sell.

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If the traditional pattern holds true this year, we should see the averages decline until Christmas and then stage a final rally into January.  At that point things, look ugly indeed.

I see those who are touting the positive aspects of years ending in 5.  From 1885 to date, there has not been a down year in the stock market ending in 5.  However, that is a bit of a statistical trick.  Actually, going back to 1835, there have been two down 5 years - 1865 and 1875.  So, the pattern is not as infallible, as some are saying.

It is interesting that every 5^th year of the decade since 1885 has had a down first quarter.  Only 1975 avoided that curse, and that year the market was coming off the worst bear market low since the great 1929 crash.  If you are a believer in the bullishness of years ending in 5, you should still be wary of the first quarter. 

Another problem is that with the current market so overvalued and in the midst of a secular bear market that began in 2000, we might want to leave the idea of a down year ending in 5 open.  Every 5^th year has not been up, and it has been 130 years since the last down 5^th year.  We are due … perhaps overdue. 

The stock market seems to have muddled through October without a disaster, but my technical work has not improved at all.  Stocks at large look vulnerable … very vulnerable.  The powers that be may well have been stabilizing prices so as not to have a stock market disaster to deal with during the election season.  However, once the votes are in, I look for the market to begin adjusting to where it should have been all along.  That means a later than usual seasonal selloff in November.

The best bet is to buy precious metal stocks during a November correction.  This may be the best buying opportunity in gold and silver you will see for some time. 

I am advising readers to hold their energy stocks, although I feel that if the stock market does, indeed, crash between now and the end of the year, all sectors will fall - including gold and energy.  The basic longer term difference will be that the metals and energy issues will recover, but the rest won’t.

The bulls are pooh-poohing the seasonal tendency for the market to decline during the months of September and October.  They argue that the expectation of weakness during these months has built up a sizable short position in the market that will unwind once the elections pass … and all is well.  Unwinding these shorts will then propel prices higher.

Unfortunately, I don’t see much evidence of pessimism in the market.  If anything, it looks like the optimists are putting the final touches on the rally that began in August.  In the beginning, the rally ignored the Nasdaq and totally turned a blind eye to the high tech stocks represented by the Semiconductor Index (SOX).  As the rally has progressed, however, the most speculative issues represented by the SOX have begun to advance.  When the junk begins to run, you know you are at the end of the move.

So, there’s plenty of bullish jawboning, but I will go with history.  History tells us to be cautious during September and October.  If a crash is going to unfold, this is when it will happen. 

There is not much positive that can be said about the stock market here.  All of the oscillators I use are oversold, but that is how bear markets act.  They get oversold and stay there.  Bull markets do not get this oversold in the first place, and they rally immediately - from even minor oversold readings.  But then, we are not in a bull market, and we should not expect it to act as such.

We could see a trading rally develop.  If a rally sets up with decent odds of making some money on the long side, our timing models (Phoenix and/or the Nasdaq Fast Tracker) will give us the green light.  Nevertheless, I look for lower levels in the averages through the end of the year.

The stock market is definitely in a distribution phase.  Virtually all of my technical work points to lower stock prices.  I have a downside objective for the Dow at 8,000 and the S&P at 900.

The surprise will be how this unfolds.  Take a look at the declines in the summers of 2001 and 2002.  This time should be similar.


Chart courtesy of www.bigcharts.com

The stock market looks like it’s hitting a high point here.  We were able to make a few dollars in our Nasdaq Fast Tracker program during this rally, but that program is back in money market funds and the party is coming to an end.

You might take a look at buying a few shares of the Rydex short funds - Arktos and Ursa.  We have guidelines in the letter.  Our Hyperion trading model will give you the prices and guidance you need if you are interested in short selling individual stocks.  The important thing, in general, is that you have stop loss protection under your positions.

This market very well could crash.  We could see a crash like we saw in 1987.  Although it seems a bit early, I think we could see this happen after the summer is over.  The market has the potential to take a sudden and devastating move to the down side.  You should be prepared.

Our forecast low in March and rally into late April has occurred, and we are now at the threshold of a major turn in the stock market.  There are many problems underlying stocks: the weak dollar, the prospect of higher interest rates, huge debt burdens, negative seasonal factors, etc.  One clue that there has been a serious change in the market is the jump in daily new lows over the last two weeks.

It is time to put protective stops on your positions, and raise cash in any further strength.  The balance of 2004 looks very bearish.

There has been an interesting tie between the stock market and the gold market for the last six months or more.  They both have been moving in tandem, which is unusual.  Normally, gold and the stock market will move in opposite directions, and I expect that inverse relationship will return.  From here, you should look for the stock market to move lower while gold moves higher.

I have been advising Professional Timing Service readers to expect a rally from lows in March to a very important high in April.   We are close to the beginning of that rally now, although my index timing models have not given us a green light for either of our equity mutual fund trading programs.

The most important thing for investors to do is to be prepared to raise cash during this rally.  You must not get taken up in the bullish enthusiasm that will develop as the averages move higher to test the highs set in January. 

You will hear a lot about the bullishness of election years, about low interest rates, about the promise of the economy.  You will be hearing about the bullish implications of a lot of things … but the stock market will be topping out in April, and the balance of 2004 looks very bearish.

We are gearing up to liquidate positions - even in some of our recommended energy stocks since there will be an opportunity to replace them at lower prices later in the year.  We may even be compelled to sell some of our precious metals positions this summer.  The descent in stocks we see coming will not be kind, and we will see Wall Street caught up in a stampede of selling to raise much-needed cash.

 Charts courtesy of www.bigcharts.com

I continue to expect the stock averages to waffle about until mid-April.  The trading until then may become quite erratic.  The big bull run is not over yet, but we are seeing its last days.  My cyclical work is suggesting that once the high is in this summer, the market will zigzag its way lower for the balance of the year.  Likely, there will be no big panic selling - just that constant erosion of values that keeps investors in much longer than they should stay.

The S&P 500 looks like it is trying to put in a double top here in February.  If this proves to be the case, you are likely looking at the best levels in the S&P for some time.

The Nasdaq has fallen to the back of the pack lately, showing very poor strength relative to the rest of the market.  The Nasdaq is simply not leading the rallies; and whenever that happens, you should be on guard.

I know.  I have heard that we have nothing to worry about until after the elections, but I am beginning to suspect that the Fed will raise rates this spring.  I think the economy will continue to show disappointing results, and the stock market - in typical anticipation - will begin heading down by the end of April.   And … John Kerry may well end up being the next President of the United States as a consequence!

The stock market is most apt to get into a sloppy trading range for the next 6 to 8 weeks.  The pros will be liquidating (distributing) their long positions against the crowd buying.  Not since before the great surprise crash in 1987 have we seen this many bulls.  It is not good to follow the crowd, and the pros are about to leave that group.