Devoted to understanding the basics and fundamentals of investing

Well! I have NEVER been so OFFENDED in all my life! The NERVE you have to characterize my pet trading system as potentially fraught with RISK which could lead to financial RUIN! Oh my! Hurumph! And gerrrrr!

Just kidding... Actually you did a better and fairer job synopsizing the important points of these simple but powerful trading techniques than I could ever have done. Thank you again, Larry!

BUYING & SELLING STRATEGY (INTRODUCTION)
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Buying and selling is extremely difficult for many of us to do. This seemingly simple task is far easier said than done. I will examine why in an attempt to prevent the problem from impacting your portfolio. This is a FAST SUMMARY. (More is coming later).

THIS ENTIRE POSTING RELATES TO LONG TERM TRADING RULES. Our intermediate trading strategy will be covered later in another posting.

There are many OLD WIVES TALES and erroneous advice on this subject. It is fair to point out that what is appropriate and proper for a short term trader can be a disaster for the long term investor. Those tactics that are proper for the long term investor can be equally disasterous for the short term trader.

When it comes to buying and selling, you are ALWAYS WRONG. Hindsight will always be 20-20 and will tell you that you should have bought (or sold) sooner (or later). Pick any one of the conditions. Perfection in the stock market is simply not possible. If you attempt to be perfect, you are simply going to lose. If you make a profit you are a winner. The size of your profits will ALWAYS be less than perfect. JUST ACCEPT THIS FACT AND NEVER LOOK BACK.

We simply strive to end up the year with more profits than loses. You WILL have losses. Accept them and go on to the next trade opportunity. Never look back. Just be happy that you ended the year with a profit overall. Some years will be good, and other years not so good. That is the way it will be. We are playing a game like horse-shoes, where you only need to get close to win. Do yourself a favor and remove the word "perfect" from your stock market vocabulary.

We tailor our trading rules for WHO WE ARE. Some examples of old wives tales that you will hear over and over: Never throw good money after bad. Cut your losses short and let your profits run. Sell before it goes lower. Buy before it goes higher. The market is going much higher, so BUY NOW. The market is going much lower, so don't buy now.

As LONG TERM traders, we are NOT AT ALL concerned with the day to day and week to week squiggles of prices. We buy and sell on CONDITIONS, not on prices. Prices are a meaningless number to our buying and selling decisions. Prices only relate to marking our portfolio to the market in order to see what the total dollar value is any given period of time.

Please note that our intermediate term trading using margin and cash reserves has an ENTIRELY DIFFERENT set of rules. That subject will be covered in another posting later.

SELLING OVERVIEW
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* We sell when the PE Multiple gets too high.
* We will sell half on a STOCK SPLIT. We never allow a single stock to "take over the portfolio." There are plenty of other growth stocks to buy, some even better.
* We sell when earnings growth of the company falls below our most REASONABLE expectations. The propaganda from Wall Street of "Earnings Less Than Expected" means nothing to us. It is OUR expectation of earnings that counts. Our expectations are far more reasonable than are those of some broker who promotes the barrage of misleading sales propaganda. Look at Philip Morris, which had many flat earnings, and even a few blips here and there.

BUYING OVERVIEW
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* We buy NOTHING unless it looks good to us in the chartbooks. We ignore the Media Hype and the propaganda. We ignore BUYING PANICS.
* We buy ONLY Growth Stocks.
* We buy when our market-timing software generates a buying signal telling us to buy. There are at least two and sometimes three excellent entry points every year. We are not PANICKED into buying by rising prices or by MEDIA HYPE.
* We buy when we are good and ready to buy. We let our cash sit and collect money market rates until the RIGHT TIME.
* We use a special DOLLAR COST AVERAGING formula to add to our positions held and thereby reduce our AVERAGE COST PER SHARE.
* We keep each investment SMALL so that dollar cost averaging is EASIER to afford and accomplish.
* We strive for as many SMALL positions as possible: All in high growth stocks.

THE DEVIL IS IN YOUR HEAD (A VITAL TOPIC)
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This is such a VITAL topic that I'm going to launch into it again. Proper buying and selling is simply impossible until you first take control over your greed and fear. The devil will influence you to sell when you should be buying, and buy when you should be selling.

YOU ARE GOING TO BE INCAPACITATED BY FEAR AND GREED. I don't care how smart you think you are, or how great your computer software is. Your perfectly written strategy that has worked flawlessly for years of "pretend trading" will just fall by the wayside as the devil takes control over your body and soul.

YOU ARE YOUR OWN WORST ENEMY. It takes determination and experience to conquer your fear and greed. It may take many years for you to feel cool, calm, and collected as your portfolio rides a roller coaster of ever rising altitudes. It is difficult to accept your monthly brokerage statement with the same reservation that you feel when playing a game of Monopoly...

Money is food. Money is good. Money represents everything that you ever wanted materially in life, or all that you could wish for. It is the genie in a bottle that is extremely hard to come by. It measures success and failure. You are what your money gives you and what you make of your money. If your career pays you $30,000 for a year's work, then $30,000 is a GREAT DEAL OF MONEY to you. If you are like most of us, 10% of that takes a great deal of blood, sweat and tears to save. Most of us get into the habit of spending more than we earn, making that $3,000 savings even more difficult to come by.

Where your HARD EARNED money is concerned, you WILL get extremely emotional. A loss of $100 may represent food not put on the table. It could (theoretically) mean the mortgage not being paid on time that month. Its loss can easily drive FEAR and PANIC through your soul. If $100 is not enough to make you PANIC, then perhaps $1000 is. No, you say? Then $10,000 will. Or $100,000 will. At some point up the Dollar scale, YOU WILL PANIC. If your salary is $300,000 per year, it may take MUCH more to make you panic, but YOU WILL PANIC at some point.

KEY POINT: A stock PROFIT also represents that same bag of groceries, and that same mortgage payment. Fear of losing a stock profit can be equally gripping.

Can you imagine your FEAR if you have a profit of $40,000 or $80,000 that you are afraid may evaporate? (What goes up, eventually comes back down). The stock market conditions us to expect extremely large profits to evaporate rapidly. We are conditioned to "sell before it goes down again." We are conditioned to "sell too soon."

ANOTHER KEY POINT: You will look at the value of your portfolio frequently. You will consider a portfolio going UP as MONEY MADE and a portfolio going down as MONEY LOST. What if you see your portfolio drop in value by $30,000? This represents 10 years of scrimping and saving. Will you think of selling in PURE PANIC? I say that you will very likely PANIC.

STOCKS MORE IN PERCENTAGES, NOT DOLLARS PER SHARE.
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ANOTHER KEY POINT: We are programmed to think in terms of value per dollar. We look at two items: one at $110 and another at $100. That $10 is significant. We then see an item for $11 and another for $10. We poor devils have only a fixed amount of dollars to spend, so that $110 or $100 is a serious consideration, where we may not think twice about spending $11 instead of $10. YET BOTH ARE ONLY A 10% INCREASE IN PRICE.

Stocks bought and sold on the markets have no such restriction. There is seemingly an unlimited amount of money available to buy stocks. Stock prices do not know a dollar limit! When the dollar price gets "too high" the stock is simply split. Stocks move in percentages of the current price. Consult your chartbook, and take notes on the price action of IBM. Notice that its weekly price changes are $5 or even $10 (5 or 10%). Now examine a $5 stock and take notes on its weekly price changes. You will see it moving 1/4 point to 1/2 point. THE CHANGE IS STILL 5% or 10%. Now look at a $20 stock and notice that its weekly price changes are STILL in the 5% to 10% RANGE: $1 TO $2.

If the earnings of a company were to go up 50%, the stock price will follow sooner or later. The stock will also move up 50%. The $5 stock will move up to $7.50, the $20 stock will move up to $30, and the $100 stock will move up to $150.

You are likely to be a "Doubting Thomas" on this KEY point. So do us both a favor: refer to your long term chart books to prove it to yourself. You will see how the stock price is attracted to the earnings per share over and over again, like a magnet.

It follows that your PORTFOLIO will also change by percentages. If the market is down 20%, you may see your portfolio down 20% also, more or less.
Assume that your stocks appreciate 30% in value. A $5,000 portfolio will rise to $6,500. A $100,000 portfolio will rise to $130,000. A $500,000 portfolio will rise to $650,000.

As you can see, as your portfolio grows, at some point along the way, a MINOR 30% change in value can exceed your savings for many years. I GUARANTEE that your portfolio fluctuating by 30% is both normal and routine. It is simply the nature of how the beast behaves. If you can learn to accept this, it will help you to control your fear and greed.

KEY POINT: This RULE is NORMAL and to be expected in an EXCELLENT, WELL DIVERSIFIED portfolio: You may FREQUENTLY experience three steps foward and one step backwards in any normal bull market (a normal bull market cycle, as seen over and over again by your market-timing software).

If you can't accept 30% portfolio fluctuations both up and down, then do yourself a really big favor and keep your money in a passbook savings account. The stock market is absolutely not for you.

You will notice that every three steps forward (market cycle) takes your excellent portfolio to higher highs (assuming you pick good stocks, of course).

Your changing portfolio value is neither an aggregate profit nor an aggtregate loss until you sell everything in the portfolio (like marking your portfolio to market). It is merely a changing asset which you may use as collateral to borrow money against. An individual stock in your portfolio is neither a profit nor a loss until it is sold. The wide and sometimes wild price changes in each individual stock simply represent buying and selling opportunities, not actual profits or losses taken (booked). For purposes of the long term strategy outlined within this posting, the wider the price changes, the better. We look at the cost of our stocks as an AVERAGE cost, since we expect to add to our positions when prices are down.

BUYING STOCKS
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WE TRACK AND MEASURE THE BULL MARKET.
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As measured by our market-timing software, all strategies in this posting are written from the point of view of BULL MARKET STRATEGIES. The monthly charts used in our market-timing software help us to define BULL and BEAR markets. When the conditions for a BEAR MARKET, as measured by our market-timing software become apparent, we swing into a new and different (defensive) strategy. The odds are fairly good that you will be selling out most of your portfolio even before your market-timing software says you are entering a "Bear Market," if you follow the selling rules outlined in this posting. Of course, past performance is no guarantee of future performance. Your results may be different. I will try to devote an entire future posting to how I use my market-timing software indicators to help signal (alert) me to the next proper (or appropriate) action to take in the market.

WE BUY STOCKS ON EVENTS
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Our stock purchases are driven by events, not prices. We buy when our market-timing software tells us to buy. We buy on a pre-defined formula that I call modified dollar cost averaging. We have little interest in chart formations and limit orders at that point. We don't attempt to buy at the lowest possible price. But we usually succeed in buying low enough. We are happy getting close to the best price. Remember our main strategy: we plan to BUY TOO LATE and SELL TOO SOON. Greed and fear have no place in this operation.

GOAL: 10, 20, OR EVEN 40 STOCKS IN YOUR PORTFOLIO
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Some of you might accuse me or "over-diversification." I will totally agree. That is EXACTLY what I want: over-diversification. At the heart of our buying strategy are MANY SMALL POSITIONS. If we have 20 stocks, all growing at 30%, then our overall portfolio will grow at 30%. In actual practice, some stocks will do MUCH better because of mergers, takeovers, etc. Others will do worse because of failing earnings, restructuring, or just slow response to higher earnings. Overall however, they all balance each other out. Enhanced portfolio growth is achieved by intermediate trading, using the long term portfolio as a source of MARGIN money. Then we will trade our market-timing software's intermediate term cycles.

ABOUT DOLLAR COST AVERAGING
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Traditional dollar cost averaging dictates that you invest a fixed amount of dollars each and every period. A period might constitute a week, bi-monthly, once every month, etc. The theory here being that in months when stock prices are high you get far fewer shares, and during months when prices are low, you get a much larger number of shares. This is one of the few buying strategies that works more often than not. It is a good strategy. I use a "modified dollar cost averaging" approach. It is modified because I use my market-timing software to pick the period to buy more shares, and when to buy more shares. On average, my market-timing software gives its fantastic BUY SIGNAL at least ONCE per year, and sometimes two or three times per year. (I have gone back to my chartbooks and marked my market-timing software's buy signals on almost any selected stock, and seen for myself how timely these signals really were). Essentially, I don't buy ANY stocks at high prices, and I save my gunpowder (money) to fire exclusively at low prices. That's the modification to my dollar cost averaging buying strategy.

HOW MUCH TO PURCHASE?
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The dollar amount invested should be small in order to allow you to manage each position properly. The minimum to invest should be large enough so that your broker commission does not become excessive. If you were to invest $100, your minimum broker commission could amount to 25% (or more) of the trade, an unacceptable overhead. It should also be affordable for your budget. A $5,000 investment will certainly reduce the portion spent on the commission, but may not be affordable, and could also make it difficult to manage. A $1,000 to $3,000 investment may be just right for you. Disregard the need to buy round lots unless it conveniently fits into your $1,000 to $3,000 budget. It is FAR MORE IMPORTANT to have a small and manageable position than to have a round lot. As you will see, dollar cost averaging on bargain stocks becomes impossible if your stock position is too large.

BUY AT THE MARKET
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It doesn't make a bit of difference for a long term investment whether you buy a stock at 20 or 22. Look at Philip Morris again in your chartbook. Ten years ago the difference between 40 and 45 is simply a dot on the page (adjusted for splits). When you get greedy and attempt to play games with open orders, you will risk NOT GETTING THE STOCK AT ALL. Too many times, I have seen friends play games with purchase prices and then miss the boat altogether. Get that position when your market-timing software tells you to buy. You can always add to your position later IF the stock ever gets to your "perfect" price. (And if you insist on trying for that last dollar and are willing to spend the time, at least use TRENDLINES to determine a BREAKOUT price). Over the years, it's my opinion that overall results are not worth the negligable gain in squeezing out the last point. DON'T BE GREEDY. You are still NOT going to buy at the bottom dollar even if you do use trendlines and some great voodoo system.

If you enjoy spending the time and energy trying to pick bottoms, then by all means knock your socks off. However, you don't need perfection to win. You need only get into the ballpark to win. We will get close enough to the bottom price with a special dollar cost averaging formula. If you like to play games with purchase prices, then I highly recommend buying your stocks by using PUT options. People will pay you CASH if you will promise to buy your desired stock at a bargain price (a price below the current market price). Larry already covered PUT options in his earlier postings (and I commented on them, for your reference).

KEY POINT: PERFECTION IS NOT POSSIBLE IN THE GAME OF HORSE-SHOES OR STOCKS. We are playing a game very much like Horse-Shoes. You only need to get close to win. A ringer once in a while may feel good, but it's just not necessary to win most of the games played. Old friends who have attempted perfection have frequently lost in the attempt.

MANAGING THE POSITION (DOLLAR COST AVERAGING)
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BIG PICTURE: This long term strategy specifies when and how to buy, when one of your stock picks becomes a bigger bargain. It guarantees that your average price is VERY CLOSE to your last purchase price. Sometimes, it makes you a buyer when everyone else is selling. It also gives you a much larger number of shares at the lowest prices. There is an exhilarating feeling to buying when others are having sleepless nights, selling in pure panic. They are in such a hurry to sell. I recall Microsoft in 1988. It had fallen from $75 a share into the mid-40's on HEAVY negative publicity. It fell into the 30% rule AND my market-timing software said it was time to buy. I picked up my first position in Microsoft at that time. It simply didn't matter if I bought at 42 or 46. If you look at where Microsoft is today in your stock chartbook, you will see why.

If our stock pick and our timing are both good, then our stocks will just go straight up and never see our purchase price again. Some of your picks will do just that, and dollar cost averaging will not be necessary. Unfortunately, the MEDIA sometimes interferes with one of your picks with such HYPE as: "The stock was taken from a buy to a hold by such-and-such broker," or "earnings less than expected," or an over publicized lawsuit, or a rumor, or whatever else strikes the fancy of the MEDIA to get you to sell. You picked this stock because it was among the BEST growth stocks that you could find. If it should go down in price, it is a bigger bargain. I leave a stock alone unless it should drop in price by the 30% or 50% rule. If that happens, then it warrants another EQUAL DOLLAR INVESTMENT. Note that very few investment stocks drop by 50% and those that do eventually rally. If it should drop another 30% or 50% it requires another investment of an equal dollar amount. The net result of this unusual strategy is that you get FAR MORE stocks at the cheaper price, and your break even is very close to the last purchase price. The smallest of rallies will put you into an extremely profitable position.

First purchase: 100 shares @ $20 = $2,000 totaling $2,000 for 100 shares = $20 average cost per share.

Second purchase: 200 shares @ $10 = $2,000 totaling $4,000 for 300 shares = $13.33 average cost per share.

Third purchase: 800 shares @ $5 = $4,000 totaling $8,000 for 1,100 shares = $7.20 average cost per share.

This is an EXTREMELY aggressive buying strategy that acquires to greatest number of shares at a very low price. This approach is not for everyone, nor can it be used on your entire portfolio during the normal correction. If you would like to use this strategy, it does require the use of margin, and requires experience. If you are new to the stock market, DO NOT ATTEMPT this approach until you have some real experience using your own market-timing software successfully. You MUST be intimately familiar with your market-timing software's response to the market cycles before you can risk using margin on this strategy. Margin (borrowed money) can be the most powerful tool in your arsenal, and it can also destroy your life's savings. I will devote an entire future posting to using margin properly, so for now just be aware of this strategy.

This dollar cost averaging approach can be tailored to suit your individual stocks. For example, the HIGH TECH stocks are normally so volatile that the 50% rule is more appropriate to use. Less volatile stocks such as Philip Morris or Abbott Labs will work best with a 30% rule. Study your individual stock pick in your long term chartbook, to see what is normal during each market cycle. Examine Philip Morris to see how many times a 30% drop in its price has occurred. You will be surprised!

This strategy also takes excellent advantage of the nature of price declines. Stocks go down FAST AND FAR. Fear and Panic grip the stockholders and they sell at any price before it goes down further. Price declines feed on themselves and a stock can drop 30% or 50% in days or weeks. Months or years of appreciation can be wiped out in a very short time. Let the devil rule others. You will be eager to pick up large numbers of stocks at super bargain prices. The eventual recovery will significantly enhance your profits.

I also use this strategy on stocks that I no longer want. If one of my positions should report a bad earnings, the stock usually gets immediate and severe PUNISHMENT. Severe price drops of 30% to 50% are not uncommon. In most cases, fear and panic send your stock down too far. It gets overdone, and I jump in to pick up the oversold stock. The resulting BOUNCE from the bottom quickly places me into a profit. I then elect to pick the time to sell at a profit. Study your stock charts to see how FREQUENTLY stocks make wide price swings after an earnings decline. Stock prices are much like a rubber ball hitting the floor. They almost always bounce, even if it is a DEAD CAT bounce. You can count on the short term traders, speculators, options traders, and even company stock repurchase programs to keep a stock ALIVE and MOVING. This dollar cost averaging approach has worked MOST of the time in the past. It is not perfect, but then nothing in the stock markets is. We only need something to work more times than not to win. Will one of your dollar cost averaging ventures ever result in a TOTAL LOSS? I suppose it's possible, of course. I don't know of a single example. However, as I pointed out earlier, if you have kept each position small, and you have 10 or more positions, you will likely survive even a total loss on a single company going under. Will Philip Morris or Abbott Labs ever go under?

It is surprising how the MEDIA overdoes the negative earnings reports. When you have the facts at your fingertips with 4000 stock charts, all with 12 years or more of price and earnings history, you will be SHOCKED to see how many stocks hold up under earnings that go to ZERO or worse! You will very soon realize that you are better off following rules and ignoring the news. A bad earnings report is frequently followed by negative news, with an IMMEDIATE DROP in price to "train" all of us to sell on such news. However, your study of the long term charts will prove time and again that these massive drops are usually followed by significant rallies, and much higher prices later.

As you can guess, if our newly purchased stock goes down less than the 50% or 30% rule specified, we leave it alone to find its way eventually back to the rising earnings line. Since we plan on having a portfolio of at least 10 stocks over time, changing prices are non-events until we either sell on a condition or perform the dollar cost averaging rule. (Prices and cycles are vital on our supplemental intermediate term trading, covered in a later posting).

If none of our stocks qualify for the 30% or 50% rule, then we simply reinvest our dividends and other investment cash when our market-timing software tells us to.

SELLING STOCKS
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We sell stocks on EVENTS, too. A particular price is just not a factor in our selling decision. Under ideal conditions, we will never sell our growth stocks. They will spend many years just doubling and splitting, and making us filthy rich. (What do you mean when you say I am being naive)?

In real life however, certain events will make us sell one or more of our stocks. (Rare events like the beginnings of a BEAR market may even force us completely out of the market into cash).

1. A Stock Split
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The stock has had a large run up in price, and it is now commanding a larger percentage of our portfolio. We sell off a portion and later use the cash to become more diversified. The two for one (or more) stock splits are IDEAL events for selling stocks. They usually occur after a MAJOR run up in price, and the uninformed public becomes WILDLY enthusiastic at the prospect of receiving two nickels for a dime, or four quarters for a dollar. We know from studying our long term stock charts that stock splits frequently mark the stock's high for months or years to come. We sell on a stock split to take advantage of the HYPE and MEDIA surrounding the stock. The news about a company is ALWAYS GREAT at stock split time. We put all of that HYPE to work in our portfolio. Its earnings and sales are still growing, so we keep the balance of our position. Be careful about the PE Multiple at stock split time. The stock split is frequently the high point on the PE Multiple, as well. If the PE Multiple becomes excessive, it may be better to sell the entire position. An excessively high PE Multiple by my definition is 40 or 50 times earnings. You will remember that if you have been following my previous postings as commentary on this blog.

2. The PE Multiple Went Way Out of Sight.
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We purchased the stock at a normal price of 15 times earnings. Not a bargain exactly, but not overpriced either. However, as it doubled and split over the years, the public began to take notice of it, and drove the price up to 25 times earnings. As time passed, it became even more popular and it went up to 50 times earnings. If anyone is willing to give me 40 or 50 times earnings for one of my stocks, it is theirs, no questions asked. I call the broker and sell at the market. Near the tops of major bull markets, such as 1968 or 1972, 1987, 1999, you may be selling your ENTIRE portfolio to the over enthusiastic crowds. There is NOTHING wrong with trading grossly overpriced stocks for cash. You will collect money market rates while you wait for stocks to get more reasonable. This is the ideal time for using the BEAR MARKET STRATEGY, explained in a future posting.

3. The Company Earnings Are in Real Trouble.
--------------------------------------A single bad earnings report will not get me out of a stock. I add up the trailing four quarters every quarter. If the trailing 12 months' earnings fall below a trend line, it is time to consider selling the stock. If something fundamental has gone wrong, it may well be time to sell.

Has the growth stopped? Or is there a good reason for the drop in earnings? Did the earnings just go flat for a time, just to resume growth again in a year? I look at the company's sales for an answer, and read the quarterly report. If there is still an uptrend in sales, I don't get too worried. One of my most profitable stocks of all time reported a LOSS one quarter. The stock went into a FREE FALL, forcing my 50% rule not just once but twice. Frightened stockholders GAVE their stocks to me at a small fraction of their original price. The reported loss was caused by the purchase of an office building out of current earnings. The company's sales were up over 100% for the quarter! I was thrilled to be GIVEN such a great stock at such bargain prices. Those shares over a few years went up over 400% and there is still no end in sight to the growth of this company.

I NEVER PANIC when one of my stocks PLUNGES on bad earnings news. Assume my stock just goes out of business and I take a TOTAL loss (an EXTREMELY unlikely event, right? Especially if I have done my homework carefully in the process of picking a good growth stock). DO I CARE? DO I GET AN ULCER WORRYING ABOUT IT? DO I HAVE SLEEPLESS NIGHTS? WOULD YOU?

OF COURSE NOT! Assuming the absolute WORST, your portfolio has only lost 10% or less of its value (if you've followed the rules posted here when you bought the stock). Since your remaining stocks are still growing at a 30% or better clip, you will likely end up the year with growth in your portfolio.

If the stock only fell 50% (also unlikely), your overall portfolio will only drop 5% for that day. Since you are used to 30% swings every year, you won't even notice a little 5% blip! SO DON'T JUST FOCUS ON ONE STOCK. Instead, just follow your rules, and see what the news is all about. Wait for the next quarterly report to read all the details. You have all the time you need to sell off a stock. Time is on your side. Wait for your market-timing software to give you its SELL signal, and plan on selling the stock on YOUR terms. The WORST POSSIBLE time to sell is during the initial panic selling over the NEWS.

I have always followed the dollar cost averaging rules first, and then sold later if a study of the quarterly reports is really that bad. Normally however, the BAD NEWS is grossly exaggerated and the following response was emotional and excessive. Within weeks or months, it is right back where it was before, and still growing.

One of the GREATEST growth stocks of all time, Philip Morris, has been sent reeling time after time over the Hype and Publicity associated with their potential liability to cigarette lawsuits. Each time was a great buying opportunity, since the pullbacks were typically 30%.

There are proper methods to sell as stock, and there are improper methods to sell. Since we have time on our side, let's do it the right way: Sell your stock with call options!

In my next posted commentary, I will cover MARGIN and INTERMEDIATE TRADING, as promised earlier.

MARGIN & INTERMEDIATE TRADING
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We are getting into some exciting areas now (finally). I suggest to you that if you fail to use margin from time to time as part of your stock purchase strategy, you will have little or no hope of ever building any appreciable wealth in your lifetime. Good stocks and good timing will make good money for you. But if you want to take the EXPRESS train to unbelievable profits, you have no choice but to use MARGIN DEBT. If we had to buy stocks with our pitiful small savings which we are able to scrape aside each year, we would surely die of old age long before our portfolio made any truly significant gains. Using debt wisely is a very GOOD idea. Walt Disney amassed a huge fortune by going heavily into debt. When he died, he reportedly had over $20 million in debt. Of course, his assets FAR exceeded that number. Other Peoples' Money can do wonders for you, if it is used wisely and with great caution.

In that same breath, be very much aware that margin can and WILL destroy your entire portfolio and leave you penniless if it is used with greed and abandon. I have a friend who lost everything he had made in the stock market, which was over $1 million dollars in profits on an initial investment of $50,000, in less than two years, simply by beeing GREEDY with his margin account. Do yourself a great favor and DO NOT USE MARGIN AT ALL until you can buy and sell stocks routinely with total control over the DEVIL. When you are practiced at selling too soon and buying too late without a second thought, and without looking back, then you MAY be ready to start using margin judiciously. When you can routinely buy when everyone else is selling, and sell when everyone else is buying, then you MAY have graduated from a crawl to a walk. When you are intimately familiar with using your market-timing software and anticipating its next move, then you MAY consider the controlled and prudent use of margin. Even then, I suggest you only use small amounts of margin on each cycle of your market-timing software initially, to "ease" yourself into the following new strategies.

Margin offers DRAMATIC increases in your power to make money. This new increase in POWER does not come for free, of course. THE DEVIL SHARES IN YOUR NEW POWER! Greed and fear are MULTIPLIED right along with your new financial power when you use margin. If you are unable to control fear and greed with your normal portfolio strategy, do yourself a big favor: Stay out of margin altogether. Margin power will only MAGNIFY your emotional distress.

Form and theory are more important when starting out than are GROSS PROFITS. I have always measured my percentage of gain per position instead of my dollar profit. (I still do). I am always looking for ways to maximize my percentage of gain per position, while at the same time reducing my risk of loss. THE DOLLARS WILL TAKE CARE OF THEMSELVES. DON'T WORRY ABOUT THEM. INSTEAD, LEARN TO THINK PERCENTAGE OF GAIN PER POSITION. Note that a position is not a trade. It usually takes several purchases of a company's stock to make up a position. Some purchases of this stock may be via PUT options, and other purchases may be direct (outright) through your broker. You may be adding to your position for months or even years. When you have become practiced at building up a POSITION, then you may begin to safely use margin.

The strategies that I am going to document are not necessarily the best or the only uses of margin. However, I feel that they are safer and more risk free than are others which I have seen other traders use over the years. I don't expect you to copy my methods exactly. I would greatly prefer that you build your own rules and stick to them. Hopefully your strategies will be improvements over what I suggest to you as having worked for me. At the very heart of margin trading is your religious use of your market-timing software to help you buy low and sell high.

EVERYTHING YOU WANTED TO KNOW ABOUT MARGIN BUT WERE AFRAID TO ASK
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Obviously everyone knows what margin is by now, right? Sure, you borrow money to buy stock. Everyone knows that... but WHAT IS MARGIN REALLY? Exactly how much can you borrow and when? Why? EXACTLY WHEN are you subject to a margin call? Exactly how much can you borrow at any given time? Most people simply never bothered to dig into the nitty gritty of MARGIN before plunging into the margin pool. In this case, what you don't know CAN hurt you badly! So first, we will go into some detail about margin.

MARGIN is your own personal MONEY TREE that can create enormous amounts of money right out of thin air. As your portfolio increases in its value because of your paper profits, "Purchasing Power" is created. You may use this "Purchasing Power" to buy new cars, more stocks, or anything else that your little heart desires (within the confines of the law).

Margin, very simply put, is just the ability to BORROW MONEY against the face value of your stock portfolio, marked to the current market, as specified by the rules of the Federal Reserve Board. As of now, the FED allows you to borrow as much as 50% of the market value of your account. There are no monthly payments of principle and interest deducted from your account, and you can keep the loan outstanding for as long as you like. There is, however, a charge made against your account for the INTEREST DUE each and every month. This is just a pending charge against the value of your total portfolio, marked to market every month, and not a direct deduction from its value. Normally, DIVIDENDS received will pay for some or even all of the monthly interest charges which you incur.

The money you borrow against your stocks may be used for any purpose that you may desire, such as buying a new house, or buying more stocks. You can even use it to buy options or bonds. The monthly statement provided from your broker indicates your outstanding loan balance, and the amount remaining that you could borrow if you so desired. "Cash Available in Margin Account" is the maximum amount of money that you can borrow, if you so desire to do so.

THE MAGIC OF MARGIN CAN MAKE YOU WEALTHY.
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Margin money is like magic! It can create massive wealth right out of thin air. Take this example:

Assume that your initial account value is $100,000, which is the face value of all your stocks within your portfolio, marked to current market. You borrow another $100,000 to buy more stocks. Now your new account value is $200,000, which is the new face value of all your stocks within your portfolio after you borrowed an extra $100,000 to buy more stocks, MINUS YOUR LOAN AMOUNT of $100,000, which leaves a net account value of $100,000.

Notice that in the above example, we used 50% margin. The result of the transaction is that your equity and your debt are each 50% of the total.

Suppose your market timing and your stock picks were good. Everything went up, just like it should have... NOW watch the MAGIC: Your stocks went up 50%! (not at all an unusual result on a strong positive swing of your market-timing software). So your NEW ACCOUNT VALUE is $300,000, which is the current face value of all the stocks in your portfolio now, marked to current market, MINUS YOUR LOAN of $100,000. Therefore, your current NET ACCOUNT VALUE is now $200,000.

Since you can borrow 50% of the NET market value of your stocks, YOU CAN NOW BORROW ANOTHER $100,000 (!) TO BUY SOME MORE NEW STOCKS (i.e. 50% of your $200,000 net account value total. Keep in mind that you already owed $100,000, so your NEW DEBT total is now $200,000.

Now let's look at the numbers in your margin trading account. Your NEW ACCOUNT VALUE is $400,000, which is the face value of all those stocks which are currently in your portfolio, marked to market, MINUS YOUR TWO LOANS totaling $200,000, so your NET ACCOUNT VALUE is now $200,000.

Again, notice that your debt and equity are still at 50% for each. Also notice that your account face value DOUBLED with a 50% increase in the value of your stocks.

IS THIS MAGIC OR WHAT? YOUR ACCOUNT HAVING GONE UP HAS CREATED $100,000 FOR YOU OUT OF THIN AIR, WHICH YOU CAN BORROW AND SPEND ANY WAY YOU CHOOSE. As you can readily see, this is more money "given" to you than you could possibly save from your wages in years and years (if you were paid $30,000 per year, anyway). This magic can be done OVER AND OVER again; and it has the power to make you more and more money in a very short period of time than you would have ever thought possible.

Another example: You have $10,000 cashy on hand and no stocks. You may buy $20,000 worth of stocks. You would buy $10,000 worth of stocks with your cash, and another $10,000 worth of stocks purchased on margin. This brings your account value up to a total of $20,000 which represents the total face value of all your stocks in your current portfolio, marked to market. And your new margin debt has gone from a balance of zero to a total of $10,000. Again, your margin debt is 50% of the total value of all your stocks.

MARGIN CAN SEND YOU TO THE POOR HOUSE!
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Margin money also has the power to KILL! It feels GREAT when the markets and your portfolio are going up. However, if your market timing and your stock picks turn out to be POOR ones... you will want to crawl into a hole and die when the markets and your portfolio value are going down! It then becomes a living nightmare, but you are awake.

Your broker will insist that you maintain your margin at a minimum maintenance level. That level varies with each broker. However, the average maintenance level is 30%. This means that as your portfolio sinks in value during a market selloff, your broker will be asking you for more money to maintain that 30% maintenance margin. You will likely be forced into selling some good stocks at their lows in order to pay for the margin calls made against you by your broker. This was a MAJOR factor in the crash of '87. I had a friend who was caught on full margin during that correction, and his account was sold out -- lock, stock, and barrel -- without even a margin call being made from his broker! Brutal, huh? You have got to pay the devil!

Let's re-examine the above example to see just what happens when the market plunges. Your account value started out to be $100,000, which was the face value of all your stocks in your portfolio, marked to the current market. Then you borrowed $100,000 to buy some more stocks, remember? That made your new account value $200,000, which was the new face value of all the stocks in your current portfolio, marked to market, MINUS YOUR LOAN of $100,000, leaving you with a NET ACCOUNT VALUE of $100,000.

But this time, your market timing and your stock picks were POOR! Everything went DOWN instead of up. NOW watch the MAGIC destroy you as your account plunges 50%: Your NEW ACCOUNT VALUE becomes only $100,000, which is the face value of all your stocks (down from $200,000 prior to the selloff), MINUS YOUR LOAN of $100,000, which makes your NET ACCOUNT VALUE now...
Yes, that's right: It's ZERO. You are now bankrupt. (In real life, your broker will never allow this to happen to your account value, because it could get so bad as to bankrupt him, too!)

NOW watch the MARGIN CALL LEVEL as the markets plunge 30%. (This 30%, by the way, is a normal bull market correction for the markets since it takes that much to drive people out of their stocks! Remember the market maker will be buying low and selling high)...

Your NEW ACCOUNT VALUE is $125,000, the face value of all your stocks, MINUS YOUR LOAN of $100,000, which leaves you with a NET ACCOUNT VALUE of $25,000. Note that your NET ACCOUNT VALUE is now 25% of your LOAN TOTAL.

Your broker will now insist that you sell enough stock or add enough cash to maintain 30% margin. In this example, he will want another $5,000 to satisfy your margin maintenance. Yikes! See the following example of 30% margin:

Your NEW ACCOUNT VALUE is $130,000 which is the face value of all your stocks MINUS YOUR LOAN of $100,000, leaving you a NET ACCOUNT VALUE of $30,000. This NET VALUE is now 30% of your loan amount.

A STRATEGY TO PROPERLY USE MARGIN MONEY
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If you go into debt, do so at market low points as measured by your market-timing software. The 10 week oscillator makes a minus 2000 low at least once or twice per year. Plan to be using nominal amounts of margin at this time (if using any margin at all). Use margin with extreme care. Plan on a date to get out of margin. You simply can't be in margin all of the time. Remember the "Crash of '87."

Get out of margin when your market-timing software hits its normal positive level. Typically PLUS 2000 is the level reached at least once or twice per year. DON'T TRY TO GET MAXIMUM PROFITS UNDER MARGIN. Your MAIN GOAL is to get out of margin with a profit on your market-timing software's UP CYCLE. You surely don't want to risk riding the DOWN CYCLE under margin!

MARGIN RULE #1: DON'T BE GREEDY! Greed inflates right along with your inceased purchasing power. Have your debts all paid down BEFORE the market tops out. Don't try to stay in debt until the last minute. Take your MARGIN profits quickly with a DEFINITE, CAST-IN-CONCRETE PLAN to sell something to reduce your margin within one up cycle of your market-timing software.

IF YOU GO INTO MARGIN, YOU MUST GET OUT OF MARGIN. If you can't decide what to sell to get out of margin, then sell a portion of all of your stocks. In July of 1991, a friend said that there was just NOTHING that he could sell! All of his stocks were just SUPER WINNERS. How could he possibly sell anything then? Guess what? He was forced to sell in the fall of 1991 at MUCH LOWER PRICES during Saddam Hussein's Mideast crisis. Even GREAT stocks have significant declines during market corrections.

MARGIN RULE #2: USE EXTREME CAUTION! Pace your margin. You don't always need to use full margin. Margin money should be used as though it were your own money... with the same sort of diversification and small positions that we always should use. There is a GREAT DEAL of safety in over-diversifying when you enter margin. On nominal declines to the minus 2000 level, a nominal amount of margin can be used. On major declines, more margin can be used.

WHEN TO BUY ON FULL MARGIN:
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Now you're into the really good stuff: the keys to the kingdom of wealth. Buy after major market sell-offs which regularly occur. As measured by the DOW-JONES, a typical panic sell-off can be expected to cause a 20% or more decline in just a few months! If the DOW were at 1,000, then a 200 point decline would be expected. However, if the DOW were at 3,000, then a 600 point decline could be expected! A year or more of laboring market advances can be wiped out in just a few weeks or a few months. This type of action is typical of BULL market corrections. Bull market corrections are fast and fierce. This type of MAJOR BUY signal shows up on your market-timing software's 10-week oscillator with a level of minus 6000 or more. Wait for the 10-week oscillator to move from below to above the moving average. Confine your purchase until after the big spike of "Stocks At NEW LOWS" starts heading down. Further definition of buying can be made using downtrend breakouts if you chart your positions. (You had better chart your positions).

The bear market is totally different. We will devote an entire posting to the Bear Market, its unique attributes, and my plans for the next bear market.

Study the 10-week OSCILLATOR in your stock-market timing software, particularly when the 10-WEEK OSCILLATOR is near -3000 or more. Other indicators worth watching are the STOCKS AT NEW LOWS. You will see a GIANT SPIKE equal to market sell-offs of the past. In addition, watch for the advance-decline line to break out of its downtrend. THEN go exercise your shopping list of new positions.

Carefully chart each of your selected stocks and observe their DOWNTREND lines. BUY YOUR POSITIONS AS each one BREAKS OUT of its DOWNTREND. This is about the only time in the market cycle that short term daily or weekly chartbooks can be of any real value to you, so pay particular attention to them then.

BUY ON SPECIAL SITUATIONS
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I have gone into margin (but not maximum margin) during once-in-a-decade buying opportunities. One stock I purchased on margin was at the apex of a 5 year triangle, with sales and earnings going straight up. That margin purchase resulted in a 100% gain in less than 4 months. Was margin justified?

Another purchase was on a great growth stock down 50% for no good reason. I bought heavily, and sold one year later for a 100% gain. Was margin justified?

WHEN TO SELL ON MARGIN
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Draw trendlines on the advances of your new positions and sell enough of them to pay down your debt when they break out of their uptrends. Plan on paying down your debt BEFORE your market-timing software starts its next down cycle.

YOUR MAJOR LIFETIME GOAL IN THE PROPER USE OF MARGIN
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Your goal is to put yourself $20 million dollars in debt for the next up cycle of your market-timing software. With the conservative use of margin, and through judicious use of your market-timing software, it is possible to borrow more and more on each market cycle. How much debt can you safely manage? $5,000? $10,000? $100,000? More?

Being in debt to buy something that goes down in value, such as furniture or cars, is BAD DEBT. Bad debt is to be avoided at all costs. However, going into debt to buy something that GOES UP in value can help to increase your wealth immeasurably. THIS IS GOOD DEBT and you want as MUCH of it as you can safely manage!

SOME FORMULAS TO DETERMINE YOUR PURCHASING POWER
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Your stock broker can also help you with margin formulas to plug into your spreadsheets. Here are a few that I have used over the years:

EXCESS EQUITY
PURCHASING POWER = -------------
MARGIN RATE

where EXCESS EQUITY is defined as:
* CASH DEPOSITED IN YOUR ACCOUNT,
* DIVIDENDS RECEIVED,
* CASH RECEIVED FROM THE SALE OF STOCK,
* MARKING TO THE MARKET

Your monthly statement reflects the marking of all of your stocks to the current market price. If the value of your stocks went up, excess equity is generated. Some statements refer to this excess as a cash balance or as "CASH AVAILABLE IN MARGIN ACCOUNT."

Short positions are held in a special margin account and any cash generated beyond the 50% ratio is transferred into excess equity.

If your statement does not specify "Cash Available In Margin Account" then the following formula could be used:

STOCK VALUE - MARGIN
-------------------- - STOCK VALUE =
MARGIN RATE

PURCHASING POWER

SELLING SHORT
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You must have a margin account to sell short. Therefore, I am covering SHORT SELLING in this posting. For those unfamiliar with selling short: You sell stock that your broker borrows from someone else. You MUST buy the stock at some future date so that it can be returned to its rightful owner. There are no time limits, and you may close out your short position whenver you wish. Your broker handles all the nasty little details for you. You simply instruct him to "sell to open XYZ stock at the market" to open your short position, and you instruct him to "buy to close at the market" to close out your short position.

If you did it right, you will buy the stock back for less than what you sold it for. If you had sold it for $50 and then later bought it back for $30, your profit is $20. However, if you were wrong, and the stock went UP in price, you must eventually buy it back at a HIGHER price than you sold it for: You lose.

There are problems when selling short:

1. The best that you can do is generate a 100% gain. If you sold short a $50 stock, it would have to go all the way to ZERO before you could make 100%. That is what is known as a RARE EVENT.

2. Your potential losses are greater than 100% because stocks can double or triple in price (as can your losses).

3. You must pay any dividends due out of your own pocket! Since you sold borrowed stock, YOU owe the dividend to the person from whom you borrowed the stock. A bummer.

Stocks purchased LONG have much better numbers:

1. Profits can easily exceed 100%, 200%, or more. I have made many profits of 300% or more by being long.

2. Losses cannot exceed 100%. A stock purchased rarely, if ever, achieves a 100% loss.

3. You keep all dividends paid.

THERE IS A SAFE & PROFITABLE METHOD FOR SELLING SHORT!
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You may sell short against stock that you already own. This strategy is commonly referred to as a BOX SALE, or "selling short against the box." By selling short stock that you already own, you "LOCK IN" whatever profit that you have. If your stock goes up $1 per point, you lose $1 per point on the short sale. If your stock goes down $1 per point, you make $1 per point on the short sale. As you can see, regardless of price fluctuations in your stock, your profit is LOCKED IN.

Suppose that you have a HUGE profit that you need to take before the next correction. You want to defer the taxes until next year. A short against the box is just what the doctor ordered.

Another approach is to TRADE against your lo9ng term holding. Suppose that you have a stock that you purchased at $4 (adjusted for splits) and it has just had a HUGE RUNUP in value. You KNOW that the next correction will send it back down in price. You would like to sell and take advantage of that big runup. BUT WAIT! You will give away a large percentage value of your stock to income tax. There IS another way.

Sell short against your long position, and cover your short after the pullback. This is risk free as far as your current profits are concerned. You profit on the downside, and you get to keep your stock too! In addition, if you are wrong about a correction, and your stock soars in value, you do not lose any of your current profits. You may hold the BOX open for many months (or years) as needed to see your desired correction. Just like having your cake and eating it too!

If this sounds too good to be true, there are some negative factors I should point out here. (Surprise, surprise)... First, the person from whom you borrowed the stock will get your dividends. Second, your stock may NEVER correct far enough to put your short sale into a profit. You give up ALL future price gains while the BOX is open. If you were wrong about a correction, and your stock went to the moon, you have no choice but to deliver your own stock to close out the short position. This is the equivalent of selling your stock and having to pay taxes due on your substantial profits.

Short sales against the box have special margin rules. Check with your broker since each broker has his own rules, and the rules vary by exchange.

In most cases, you can borrow MUCH more than the 50% normally required by margin rules (i.e. as much as 90%-95%). Since the value is LOCKED IN, there is NO RISK OF LOSS by borrowing against a box position! Thus new borrowed money may be used to buy more stock. There are no taxes due on the money borrowed or on the box sale. There are no time limits for keeping box sales open. Does this conjure up visions of tax free trading?

Some people have been known to do just that. They have just left boxes open indefinitely, to borrow money against to set up new boxes, to borrow even more money against, to set up more new boxes... all tax free! Unfortunately, they must pay for margin interest.

There may be other fancy and complex uses for margin, but I have not used them since I either don't understand them or I don't like the numbers. I only like limited risk/maximum gain strategies. There are many strategies being touted out there that are clearly limited gain and maximum risk (such as BUY/WRITE option programs, for instance). They are not written for me.

In my next posted commentary, I am going to have a discussion with myself about the Bull & Bear Markets. I'm not kidding!

THE BULL MARKET & THE BEAR MARKET
=================================
Introduction
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Bull markets go up and bear markets go down. So what's there to know? This whole posting is of questionable value. Read on, and you may be shocked or even surprised.

If it's so easy, why were so many people calling the crash of '87 a bear market? It was, after all, just a bull market correction of the normal and "to be expected" fast and severe 20-30% declines, following many months or years of advancing prices. So was the severe selloff during the fall of '90. If it were so easy, why were all the "experts" predicting higher prices to come in August of '87, just two months before the decline? In July of '90, why were all of the "experts" predicting a 3500 DJIA?

The truth is, few people can even agree on what a bear market is. What EXACTLY is the REAL DIFFERENCE between a BULL MARKET CORRECTION and a BEAR MARKET? What is the difference between a Bull Rally and a Bear Rally? How does one know for sure which is which? My opinions follow (which very few of you would appear to agree with).

Ask 10 people and you will get 10 different answers. As usual, past performance will not be repeated exactly in the future. However, it helps to know about history, or we are just doomed to repeat it. And it is my opinion that history DOES INDEED repeat itself somewhat. Historical data is what many respected experts, such as Zwig, uses. (If history is good enough for Zwig, then it's good enough for me, too).

THERE ARE NO BELLS RUNG TO SIGNIFY THE END OF A BULL MARKET. The "experts" will not warn you of a real bear market, because they can't even agree on what one is. Okay, it's easy, in hindsight, AFTER the carnage is over, to say it was a BEAR MARKET. But that's not good enough for me. I want to REALLY KNOW when the BEAR MARKET STARTS and WHEN IT ENDS. We need a RELIABLE method of measuring the characteristics that determien a BULL MARKET from a BEAR MARKET. What color and flavor does a bear market have that is different from a bull market?

Your market-timing software should be a big help to you in deciding, with some degree of reliability, if we are in a BULL or BEAR market. So when this "expert" or that "expert" flaps his lips about a BEAR market, I know it is HYPE and TYPICAL MEDIA BS to try to get me to sell my stocks when I should be buying more.

This posting will go into some detail about how to recognize a Bull from a Bear, when to shift funds from a bull strategy into a bear strategy, and what is a bull strategy vs. a bear strategy.
How can we tell the difference from a BULL market correction and a real BEAR market decline? (There is a difference).

THE BULL MARKET DEFINITION
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The bull market is very much like the tides of the ocean, slowly creeping up the beach. Each wave that comes rolling in inches even higher up the beach until HIGH TIDE is reached. A person standing on the beach cannot see the tide inching its way up, because it happens too slowly, just like a BULL market move. All he can see are the endless waves: Some large and some small, waves just like the endless rallys and selloffs in the stock market. My favorite description is this: The bull market is like a drunken sailor, taking 3 steps forward and one step backward. The one step backward is the BULL MARKET CORRECTION that you have learned to always expect. Sometimes the bull may only be two steps forward and one step backward.

THE BEAR MARKET DEFINITION
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The bear market is different. The tides are slowly receding down the beach. Each wave that comes crashing up the beach slowly and imperceptably inches its way back until LOW TIDE is reached, where the birth of yet another new BULL MARKET begins. A person standing on the beach can only see waves rolling in, and simply cannot tell if the tide is rising or falling. So it is with the stock market. The differences are VAST, but are nearly impossible to judge unless you stand there for hours measuring each wave. Some waves are large, and others are small. So even if you were to watch 50 waves, you may still not be sure which way the tides were going. The BEAR MARKET is like the same drunken sailor, who now starts taking three steps backward, followed by one step forward.

MEASURING BULL AND BEAR CHARACTERISTICS
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Bull markets and bear markets last for years.

KEY POINT: A 30% move (up or down) that is completed in a few weeks or a few months is simply a normal and to-be-expected "correction." It may be a BULL MARKET correction when it goes down 30%. It may be a BULL MARKET rally when it goes up 30%. It may be a BEAR MARKET correction when it goes down 30%. It may be a BEAR MARKET rally when it goes up 30%.

Is it any wonder why there are so many conflicting opinions on this subject? Observing one or two waves simply cannot determine which way the tide is going. Is today's wave the MIDDLE OF A BULL MARKET or the START OF A BEAR MARKET? Anyone's guess is as good (or as bad) as any other guess. Opinions on this subject are a lot like assholes: everyone has one and they all stink.

There are methods of making an early determination by measuring several waves (cycles). Certain other characteristics can also be easily measured which can help us to confirm the major trend.

THE BEAR MARKET SUMMARY
-----------------------
Past bear markets have frequently lasted several years. They are simply DEVASTATING. Bear markets begin with everyone conditioned to buy on the "corrections." The first correction of the bear market looks just like every other correction. As usual, everyone was waiting for it, and by this time, the use of MARGIN to buy on corrections is commonplace. After all, HIGHER prices are coming, right? It is good to borrow for higher prices. Margin debt makes RECORD HIGHS. (Inflation puts more money into the margin debt numbers each year). FEAR turns into CONFIDENCE as more and more people jump in on the BANDWAGON.

The "Crash of '87" will no longer be viewed as a "Crash" but as just another great buying opportunity. Something, however, goes wrong. Fewer and fewer stocks participate, as one stock after another establishes a new downtrend. More and more people get wiped out of margin on each down cycle. Slowly, over time, each down cycle gets a little worse, and takes in more and more stocks.

The end of the bear market is SWIFT and HORRIBLE as the vast majority of stocks go into a free fall when everyone finally perceives that buying on corrections no longer works. The last BEAR MARKET began in 1968 and lasted through 1974. Six long and horrible years that wiped out 90% or more of the value of MANY stocks. Even the "NIFTY FIFTY" and the DOW 30 were smashed to 50% or less of their former values by 1974. Some GREAT stocks even continued their sickening declines through 1976. Bear markets are similar to a BULL CORRECTION because they can destroy the largest part of the previous UPMOVE in a fraction of the time. They can wipe out a 20 year advance in only a few years. The majority of the devastation occurs toward the tail end of the decline. Until the end, most people are not aware of what is happening. I highly recommend that you order a copy of the SRC GREEN BOOK so you can see for yourself the HORRIBLE DESTRUCTION suffered by stocks from 1968 through 1974. At some point along this path, the FEDERAL RESERVE BOARD feared that falling stock prices could destroy the country!

KEY POINT: The Federal Reserve will REDUCE margin rates to allow people to buy MORE STOCKS on margin. It does not help because people just don't borrow money to buy something that is obviously going down in price. Margin rates will be dropped over and over to historic LOWS. (Currently 50% is the recent historic low).

The next bear market may be worse than the last one we experienced for several reasons:

* Computers are everywhere now. They all work in a similar way (more or less). They SELL on moving average crossovers. When a stock goes from above to below its XXX day moving average, the computer software generates an automatic sell signal. Thousands (perhaps even millions) of computers will be mindlessly selling stock. The declines from 1968 to 1974 can be speeded up by all of these computers swinging into action. Witness the correction of 1987: 500 points in a single day. This sort of correction (30%) in a bull market used to take at least 3 to 6 months to complete. How many MONTHS will the next BEAR market be? If it used to take 6 years for a BEAR market to complete its cycle, can our next bear market finish everyone off in only 6 months? I will assume it will.

* Telephone switch funds also work on moving average crossovers. Basically, when the market (S&P500) moves BELOW its 180 day moving average, it's time to call the MUTUAL FUND and SWITCH out of stocks and into BONDS or MONEY MARKET FUNDS.

KEY POINT: It is my belief that the next bear market will exhaust itself in
less than a year. Everyone with their computers will compress the next bear market from many years into a single year or even less. AN IDEAL SITUATION FOR A DIVERSIFIED PORTFOLIO OF PUT OPTIONS, don't you think?

THE BULL MARKET SUMMARY
-----------------------
BULL MARKETS also continue for many years. The bull market begins with GREAT STOCKS LITTERING THE FLOOR at BARGAIN BASEMENT prices. PE multiples of 9 are high at this time of the cycle. The PROS are the first ones in buying. They can buy FANTASTIC RETURNS ON INVESTMENT for unbelievable prices. They snap up these bargains on margin. One by one, each stock SLOWLY begins a new uptrend. The PROS are quick to begin using the new money created from thin air by margin. Slowly, over time, people begin to peek out of their devastation to see stocks making new highs. More and more people fearfully join the bandwagon. Margin begins to be popular again. The overall market climbs a wall of FEAR. Many years later, the BULL MARKET tops out with stock prices up to the moon! Toward the end, people are just euphoric. Stock clubs are forming left and right, and all of your friends have great "stock tips." Everyone is suddenly an "expert" in the stock market, and rampant predictions of higher DOW PRICES are everywhere (remember $1000 gold price predictions back in 1987?). Fear is replaced by misplaced confidence.

At that point, THE PROS ARE GETTING OUT. They know high prices when they see them. The Federal Reserve begins to fear runaway and uncontrollable market prices. They raise the margin rates. (Say WHAT?)

KEY POINT: The Federal Reserve Board will RAISE THE MARGIN RATES. As of now, you can borrow 50% of the value of your account to buy on margin. The FED will bump it up over and over again. They can bump it all the way up to 100% if they so choose. The FIRE DRIVING THE MARKET (money) is totally controlled by the FED. When the FED steps in, MUCH lower prices are coming! But not right away, however. It may take several months or more for the rising margin rates to dampen the euphoric public's appetite for stocks. There is a whole generation of new faces who have NO IDEA what rising margin rates will do to the markets. The FED is not talking. The PROS are not talking. The PROS quietly begin selling out to the unsuspecting public.

The PUBLIC IS NOT AWARE of these SUBTLE changes or of their potential impact. Stock splits and corporate buy-back programs have made stocks appear to be cheap. The public only sees stock splits, and "CHEAP" stocks. They do NOT notice that PE multiples have slowly marched up to 30, 50, or more.

Corporate America can be counted upon to split a stock as many times as needed to keep their stocks at attractive prices to the public, REGARDLESS OF THE PE MULTIPLES. There is NO ONE predicting lower prices. The last change made in the margin rates was over 20 years ago... so who can remember? There is a whole new generation of SUCKERS out there who will be drawn into the coming STOCK MARKET MANIA.

The Advance/Decline Line Measures the Tide
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Fire up your computer's market-timing software and observe the ADVANCE/DECLINE LINE. Scan back and forth in time. Notice that each WAVE of the A/D line sends it to higher and higher levels? The A/D line measures all stocks equally. It is the running total of all advances minus all declines since 1977.

The DJ, the S&P, and other market averages are weighted more heavily for IBM, Westinghouse, GE and others. One IBM can have a bigger impact on these market averages than many other stocks. I simply do not trust these market "indicators." They cannot be trusted for accuracy because an IBM or a Philip Morris has such a distorting influence upon the average.

KEY POINTS:

* BULL MARKETS HAVE A RISING A/D LINE. Each major market rally pushes the Advance/Decline line to higher and higher peaks. Each major correction low is higher than the previous low.

* BEAR MARKETS HAVE A DECLINING A/D LINE. Each major market rally fails to carry the Advance/Decline line to its previous high. Each major low just goes lower. You need to be using market-timing software which goes back far enough in time to witness the full BEAR CYCLE from 1968 to 1974.

THE MARGIN DEBT IS A KEY MEASUREMENT
------------------------------------
KEY POINTS:

* As EXPLAINED briefly above, BULL markets are fueled by RISING MARGIN DEBT. Rising prices create fantastic amounts of money right out of thin air to buy more stocks.

* Bear markets have falling MARGIN DEBT because falling prices force more and more people out of margin.

Margin debt has rallies and corrections just like everything else. We should, therefore, look for the long term TREND IN MARGIN DEBT. Your market-timing software may have historic data that far back which measures the falling margin debt from 1968 to 1974. Otherwise, you can go to the library and dig up the statistics from 1960 through 1977. Also, some chartbooks can be ordered which provide some of this information. Contact SRC Corp. for more information. SRC sells back issues of their CYCLI-GRAPHS and GREEN BOOK.

LEADING UP TO THE NEXT GREAT BULL MARKET TOP (OR THE BEGINNING OF THE BEAR MARKET)
---------------------------------------
Before we can even think of deluding ourselves into predicting the beginning months of a BEAR MARKET, it is necessary to determine the characteristics of a BULL MARKET TOP. We need to get some clear idea of the magnitude of each BULL MARKET cycle.

How did the DJIA go from 225 in 1929 to 3000 in 1990? A DJIA of 225 in 1929 was WILDLY HIGH. It moved in great cycles, or waves. Dig up some old chart books and prove this to yourself if you are a Doubting Thomas.

I must admit that I have not lived through a real BEAR MARKET as yet. During the last frothy top from 1966 to 1968, I was newly married to my first wife, and deeply in debt (from school). I was just simply too poor to even buy a single share of stock. I did, however, keep my eyes and ears open, and tried to learn whatever I could. It was simply unbelievable to see how so many people LOST, and how they LOST so consistently. I had no idea at the time that I was witnessing a long and painful BEAR MARKET slowly unwinding. During this long BEAR, the DJIA actually made a record HIGH in excess of 1,000. There came to pass a new catchword to describe the GOOD stocks as being the nifty fifty, and the "two tiered market." As time would tell, even the NIFTY FIFTY bit the dust. Most of the NIFTY FIFTY rached their lofty peaks in 1972 and 1973. A great many others reached their peaks in 1966 or 1968. Yes, the bear market lasted from 2 to 7 years, depending upon which stock groups you were invested in. By the end of 1974, most market groups were simply DEVASTATED. Some groups even continued the freefall for several more years. The SRC GREEN BOOK is worth its weight in money to give you graphic proof of the amazing plunge in stock values.

MY PLAN for the up and coming BEAR MARKET is therefore based on THEORY and HISTORY with limited experience. Those few that really experienced the 1960's are now either in nursing homes or have passed away already. In this case, my only experience with something resembling a bear market was the "Crash of '87," where I went heavily into PUT OPTIONS. (My market-timing software was absolutely SUPERAB in giving me its signal to go into PUT OPTIONS).

To make a long story short: $750 IN, and 2 weeks later $35,000 OUT. My friends who joined with me in this opportunity also made similar HUGE profits. The basic approach that I used in 1987 will basically be repeated again on our future new BEAR MARKET.

I don't know when it will come, BUT YOU CAN BET YOUR WIFE that it will come. As surely as night follows day, there will be yet another HORRIBLE BEAR MARKET. Why? It is the very EXCESSES of the preceeding BULL market that guarantees a BEAR market. Using your market-timing software will hopefully help you turn a devastating bear market into profits, instead of giant losses, just like we profited during the Crash of '87. Time will tell. A plan for the upcoming BEAR is better than no plan at all. No one has a crystal ball that can accurately foretell the exact traits of our next BEAR MARKET. We only have history as our guide.

Once your market-timing software has given its signal that a BEAR MARKET has arrived, we will have time to exit. A true bear market comes on slowly, and with plenty of indications. It is NOT rapid like a bull market correction at all. Your BIGGEST PROBLEM will be controlling yourself. It will be nearly impossible for you to watch stocks going up, while all of your friends are making such "easy money." Your MAIN problem will be believing in something that you have likely never seen before, nor lived through before. After all, only us OLD TIMERS who are now over 60 years old have any idea of what the last major cycle was like. And even those memories are likely incomplete or sketchy, since we were either too young, or too poor at that time to even realize what was really going on. THOSE FEW WHO COULD BE OLD ENOUGH TO HAVE VIVID MEMORIES will likely have died of old age by the time the next savage BEAR MARKET begins.

There will literally be an entire NEW GENERATION of unsuspecting SUCKERS drawn into the whirlwind of greed, fear, and crowd psychology. I have first hand experience with the emotional feelings involved when I placed my entire portfolio into CASH in April of 1987, a few months too early for the giant selloff that occurred in October of 1987. I sat on the sidelines watching everyone making big money during the summertime panic buying of 1987. As my market-timing software confirmed the upcoming correction, I waited until I could see the whites of its eyes before loading up on PUT OPTIONS. If you look at your market-timing software, you will see a tiny rally on the 10 week oscillator just before it went through the ZERO LINE on the downside. That little blip got my open orders for 70 PUT OPTIONS filled. And the rest, as they say, is history.

How can I really believe that a BEAR MARKET will happen again in the same way that it did between 1968 and 1974? It surely will NOT play out in exactly the same way next time around. There are just too many things that are TOTALLY DIFFERENT this time.

Options are now traded on a great many stocks. Options exist for the S&P 100 and the S&P 500, and a majority of stocks contained on those two averages. Option trading has a great moderating impact on the stock market now. It helps to keep a stable market, and helps to prevent runaway markets from going either UP or DOWN. After all, the buyers of PUT options profit by buying stocks when they are falling! The buyers of CALL options profit by selling stocks when they are rising! So option trading is clearly great as far as I am concerned.

Debt is at historical high levels now, too. Individuals, companies, and nations have taken on unprecedented debt. Some people believe that the next bear market will be caused by a massive international repudiation of debt (a horrible depression). I don't think the FED will allow that to happen. It controls the money supply, and virtually guarantees that we will have inflation for the rest of our natural lives. I am betting my money on the success of the FED to keep inflation rolling along (under control, that is).

The problems that led to the "Crash of '87" are also fixed now, aren't they? (Right on. If you really believe that, I have more...) There is now the 50 point limit to prevent stock index futures from going beserk. There is now WORLD WIDE trading day and night. The mutual funds have put limits on SWITCHING. There are just too MANY differences. So our next BEAR MARKET will still arrive, but this time with a different face.

One thing has NOT changed. GREED is just the same as it has always been. CROWD PSYCHOLOGY will be around as long as man himself. This bull market that really began in 1975 has yet to finish its massive and fantastic BLOW OFF! (A 1975 start date for the bull is controversial, but MARKET LOGIC is on my side here. Others think the BULL began in 1982).

The DEVIL is driving this BULL market right to the TOP. That same frothy, euphoric top that some old timers can remember. Yes, that same insanity from 1966 through 1968 will be repeated again. I am planning for it. I am a firm believer. I am convinced.

There are some very good books written on crowd psychology... MANIAs of the past. Our great bull market is very slowly turning into the MANIA of the future. It is happening so slowly that no one is really noticing. However, the signs are all there. Do yourslef a favor. If you are skeptical after reading this, go to the library and read one of the many fine books describing the MANIAs of the past: Florida real estate, Tulips, California real estate, etc.

The FIRST STEP in your bear market strategy is to become a believer in crowd psychology. This is the appropriate time to present the EGYPTIAN FORMULA.

THE EGYPTIAN FORMULA
--------------------
As old as time itself, the Egyptian Formula measures the increasing size of each level of the Egyptian pyramids, hence its name. It also accurately measures the increasing size of each rotation of a snail shell. Pine cones have smaller segments at each end that in the middle. Yes, the Egyptian Formula describes that also. There is more. It also measures... CROWD PSYCHOLOGY! Other stock market GURUS have taken the Egyptian Formula to amazing extremes of precision in defining primary waves, secondary waves, and the counts between them. The Elliott Wave Theory is based on concepts surrounding the old Egyptian Formula.

I prefer to disregard all of those nitty gritty extrapolations and complex derivitives. I prefer the "KISS" principle of "KEEP IT SIMPLE, STUPID." So I prefer the simple old fashioned basic formula of the Egyptian Formula: IT IS A MULTIPLIER: 1.618 TIMES A PREVIOUS CYCLE...

I actually spent an entire Saturday testing against my entire collection of chart books to see if it performed more often than not. I was amazed at how well it really worked through the 40's, the 50's, and the 60's.

Amazingly, it also appears to measure the MAJOR CYCLIC BOTTOMS of a long bull market with a very close precision. Isn't the stock market just a gigantic reflection of crowd psychology? Prove me wrong and spend a day researching old chart books. It is not perfect, of course. But it does come close enough for a GOOD game of horse-shoes. And if you have been with me for all of these postings so far, then you know that should be good enough.

Look at our current bull market since 1982. The MAJOR CYCLIC low was then 769. Each predicted future LOW will then become a multiple of 1.618 times each actual low, starting with a DJIA of 769:

Year Predicted Low Actual Low
---- ------------- ----------
1984 1244 1078
1987 1744 1616
1990 2614 2400
???? 3721 ????
etc. etc. etc.

The Egyptian Formula can even be used to predict major cyclic highs of bull markets. Multiply each major high by 1.618 to get to the next major high. As in predicting major lows, it is not perfect but it does come remarkably close. Actually, it does better at making stock market predictions than anything else I have ever seen or heard. It is therefore good enough. We can approximately target the next major cyclic high of this great bull market. The Egyptian Formula DOES NOT predict which major cyclic top is the LAST WAVE. We have to do that by ourselves! But it's an interesting formula, isn't it?

THE MAJOR BULL TOP and the beginning of A NEW BEAR MARKET
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What can we expect to see? What are the lessons from the past? History IS our best teacher for the future. Bull market tops SHOULD be easy to see. We MAY see one or more of the following. Of course, keep in mind that past performance is no guarantee of future performance.

STOCK CLUBS
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Stock clubs will be forming all around us. Stock clubs will enjoy a resurgence as more and more uninformed people join the BANDWAGON. The decade of the 60's saw a record formation of stock clubs. I can remember all the HOOPLA surrounding stock clubs during those giddy years. It seemed that every department in the company I worked for at that time had someone starting another stock club. Everyone had stock predictions. Teledyne was surely going to run up to $500 a share (it was then something like $50). Brunswick was going to double that year. There was no limit to euphoric predictions for this stock and that stock. Crowd psychology works best in a real crowd, like a stock club.

HIGH PE MULTIPLES
-----------------
The "new" crowds over time begin to notice that good stocks have ever increasing earnings and sales. They begin to take notice of the stocks like Philip Morris, American Home, Abbott Labs, and Microsoft. Larger and larger MASSES of people want in on these obvious gravy trains.

WAHLAH! PE multiples begin a long upward climb. By the end of this bull market, many GREAT American companies will have their PE multiples driven up to the same LOFTY LEVELS not seen since the 1960's. How high? Consider a PE of 35 to 50 as being NORMAL for a good stock towards the "END" of the current BULL market. As of now, those same great stocks are selling between 15 and 22 times earnings.

MARGIN RATES SUDDENLY SPRING BACK TO LIFE.
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Margin rates have been dormant for the last 20 or so years at 50%. Suddenly the Federal Reserve will announce that rates will jump to 60 or 65%. There will be a small IMMEDIATE correction as the PROS begin selling. The public will not notice and likely will crawl all over each other to buy in on the correction. Prices will surge to new highs. The FED will bump rates up again, perhaps this time to 75%. Another immediate reation will occur as more PROS begin getting out. The public again surges back into stocks, driving prices even higher. The FED bumps rates up again, this time to 85%. At this point, the PROS are GONE from the scene, and only the PUBLIC is left holding the proverbial BAG. The increasing margin rates have removed the FUEL that drives BULL markets up. An 85% margin rate means that you may borrow only 15% of the value of your stocks. A FAR CRY from the good old days when you could borrow 50% of the entire value of your portfolio.

STOCK SPLITS REACH HIGH NUMBERS
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In an effort to keep stock prices "affordable," more and more corporations will split their stocks. Each corporation likes to keep its stock within a certain price range. IBM likes its stock to be "RICHLY PRICED" at over $100. Other companies like their stocks to be in the $25 to $50 range. The public is just simply WILD about stock splits. The more stocks that split during a year's time, the wilder the public becomes. Two nickels for a dime or 4 quarters for a dollar... for some reason makes the average person on the street jump in and buy. I can't begin to explain how many people suggested that I buy this or that stock. When asked why, the answer was: "They are doing a STOCK SPLIT NEXT MONTH! Quick, buy before the stock splits!" Well, you know my strategy on this subject by now: I usually sell at least some or perhaps all of my position on a split.

KEY POINT: Stock splits will be done at ever HIGHER PE MULTIPLES.

YOUR FRIENDS
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I'm certain that you have many friends who would not buy a stock if their life depended on it. Too risky. They keep their WAD in savings accounts or money funds.

Suddenly, out of the blue, they want in on the bandwagon too, and announce proudly that they dumped their ENTIRE WAD into XYZ stock! They have figured out that it will surely double (from reading some glowing newspaper articles). Your relatives ask you about stocks. Your friends dive in with both feet, throwing all caution to the wind.

NEW ISSUES
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The favorable climate (high prices) brings a record number of new stocks to the market. Secondary offerings, New Issues, Stock Splits, Options Exercised, Convertible Bonds Converted, Equity for Debt Swaps, etc., etc., etc.

CHANGING LEADERSHIP
-------------------
As one group of stocks after another reaches their lofty peaks, it soon becomes evident that there are no more bargains left, even at inflated prices. The CATS and DOGS (low priced stocks) are the last group to move into the stratosphere. The NASDAQ and the S&P 500 begin outperforming the DOW and the S&P 100.

YOUR MARKET-TIMING SOFTWARE'S PERFORMANCE ON THE MAJOR TOP
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The broad majority of stocks fail to advance. Even worse, they begin to decline. While the DOW is making RECORD HIGHS, the advance/decline line is flat or even in a decline. See the Crash of '87 for a prime example of this VERY IMPORTANT divergence. The higher high in the DOW during August of 1987 was not matched by the A/D line.

Near the MAJOR TOP of the bull market, you will see the A/D line start a NEW long term downtrend, where every major rally of the market fails to drive the A/D line far enough to even match the previous rally. The new BEAR MARKET will be seen first in the A/D line. As the DOW reaches higher and higher, the A/D line will sink lower and lower.

MARGIN DEBT will no longer be rising. As the A/D line slowly sinks, so too will Margin Debt begin a new long term downtrend. As the FED raises its margin rates, you will see Margin Debt slide faster and faster, even as the DOW is making RECORD HIGHS.

Short Interest will likely peak out and start a new DOWNTREND, as well. Rising short interest during BULL markets, and falling short interest during BEAR markets. Just the opposite of what you might expect.

THE MAJOR BEAR BOTTOM AND THE BEGINNING OF THE NEXT BULL MARKET
---------------------------------------
We should be watching our market-timing software carefully as the Bear Market gains momentum:

* Advance/Decline line downtrend becomes steeper.

* Downtrend in Margin Debt becomes steeper as more and more people throw in the towel and get out, vowing NEVER to buy another stock as long as they live.

* NYSE PE Multiple starts a long downtrend.

* Short Interest downtrend becomes steeper.

KEY POINT: The 10 week oscillator becomes inverted. Notice that the 10 week oscillator from 1977 until the TOP of this bull market spent MOST of its time ABOVE the zero line. It occasionally cycled down below the zero line to levels of minus 2000 or 3000. On RARE occasions, it cycled as low as minus 6000.

The BEAR market IS DIFFERENT. It's just as though the 10 week oscillator were turned upside down. Suddenly the 10 week oscillator spends MOST of its time in negative territory, at levels of minus 3000 to minus 6000. The occasional cycles now run up to PLUS 3000 and the RARE occasional cycle will shoot up quickly to PLUS 6000. The end of the bear market is amazing. We can see it staying at minus 3000 to 6000 for months on end, where major rallys are barely able to go above the zero line. Truly a horrible experience for those holding stocks.

We will be watching these things and WE WILL KNOW that a bear market is in progress. However, the public does NOT know this: There are still stock groups that are making major all time highs. The DJ may even be making record all time highs right in the middle of this BEAR MARKET. There are still a lot of people throwing good money into stocks that have no place to go but DOWN. They, of course, don't know a PE multiple from a Hole in the Ground. They only see a $40 stock that has gone up to $80 and split and is again at $40, just ready to DO IT ALL AGAIN.

Of course, sooner or later, even the DOW and the S&P begin their long and painful downtrend, and follow the Advance/Decline line into ever steeper declines. The downtrends now become even steeper and faster as more and more people give up trying to buy on corrections, and just simply throw in the towel. Margin debt drops precipitously. NYSE PE Multiples drop rapidly to a fraction of their old highs.

THE BOTTOM ARRIVES
------------------
Major bottoms normally make some sort of a chart formation: A head and shoulders bottom, a "double bottom" or a long formation resembling a saucer. In any event, the last decline leading up to this bottom will be STEEP, FAST, and FAR. It will be frightening enough to make the last of the public throw in the towel and quit in pure disgust. They are so sick of looking at their stocks that they just want to get rid of them at ANY price.

The Advance/Decline line also makes its steepest decline, and appears headed for ZERO or less in short order. The A/D line will make some sort of a bottoming formation as well. PE Multiples will be CHEAP. Great stocks like Philip Morris can be purchased for PE Multiples of 9 or less! Stocks paying dividends can be purchased for a dividend yield of 6% or more.

The PROS will step in with huge purchases and begin snapping up the best of the bargains. They snap up the high yields on dividends, and the best growth stocks at criminal prices.

MARGIN DEBT
-----------
After falling non-stop for years, margin debt suddenly comes alive with a new uptrend! Strong purchases on margin by the pros pushes margin debt up rapidly.

ADVANCE-DECLINE LINE
--------------------
After completing its bottoming chart formation, the A/D line starts a vigorous new uptrend.

10 WEEK OSCILLATOR
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After being submerged for years below the ZERO line, the 10 week oscillator suddenly does another FLIP-FLOP, and now spends most of its time ABOVE the ZERO LINE. It will again look like it did from 1977 through the top of the great bull market we are in now.

NYSE PE MULTIPLE
----------------
After declining for years, the PE Multiple again starts its new uptrend.

SHORT INTEREST
--------------
Also after years of decline, the short interest starts its new uptrend.

BULL MARKET STRATEGY
--------------------
Most of the following items have already been covered in fairly good detail:

* Stay fully invested in good growth stocks.

* Add to your position on corrections.

* Use margin selectively on corrections.

* Write covered calls on major rallies.

* Reinvest all dividends and trading profits.

* Write put options to buy stocks at market corrections.

* Use dollar cost averaging to buy stocks.

* Sell stocks when their PE multiple reaches historic highs. Anyone willing to pay me 50 times earnings for one of my stocks can have it with my best wishes!

* There are many other great things that your broker or your investment advisor can recommend for a BULL STRATEGY. Use their expertise whenever possible. Option strategies can be tailored to any type of market.

BEAR MARKET STRATEGY
--------------------
Now after all of this hypothecating, can we tell when the next BEAR market is starting? I don't know, for sure. I do believe we will see some (if not all) of the characteristics I have described above in this posting. Anyway, here is the BEAR strategy. (I thought I was never going to get to this). It's simple and straightforward. It preserves your capital and at the same time allows for FANTASTIC PROFITS through the use of PUT options. I'm assuming that the many computers out there will cause the next BEAR MARKET to be FAST and FURIOUS. The last bear market that began in 1968 took 6 years to complete. This future BEAR could, I think, complete its entire cycle in 6 months or a year.

1. SELL ALL STOCKS. Put your money into money market funds (or Treasury Bills).

2. Use the money market dividends or T-Bill interest (discount) to finance an aggressive portfolio of PUT options. Roll all PUT profits into more PUT options.

When selling stocks, keep in mind one of the basic bull market strategies: SELL ON HISTORICALLY HIGH PE MULTIPLES. This approach will, we hope, get us out of most of our stocks before the beginning of the next BEAR MARKET. There are several other methods of getting out of your remaining stocks gracefully. One method is to establish a trailing "stop loss" order on your stocks. As your stock keeps moving up, raise the stop. When it falls back in price, it will be sold "at the market." You can keep the STOP 10 or 15% below the current market price to prevent minor fluctuations from stopping you out. Another method is to keep weekly charts on your stocks and sell when they fall through their long term trendlines. There is a risk in either of the above methods. Trendlines and stops are widely used. They are so widely used that they cause the decline to be even more steep and precipitous.

My method is simpler. When I can see many of the characteristics of a NEW BEAR MARKET in the making, I will simply sell all. I will not attempt to squeeze out the last 20% of profit. I want to be safely into cash months BEFORE everyone else tries to hit the exits at the same time. I will be happy to sit on the sidelines and start planning for the PUT options that I want to buy. The IDEAL time to take on PUT options is when your market-timing software's 10 week oscillator is crossing from above to below the ZERO line. Buy your PUTS at a level of PLUS 1000 to PLUS 500.

In my next posting, I will address a trading technique which I call Modified Dollar Cost Averaging, as I had promised to do in an earlier commentary.