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............................................... W a l k e r M a r k e t L e t t e r January 17th, 2002 http://www.LowRisk.com ............................................... Our model's Signal Strength is at 9 (on a scale of 0-20). There are no changes in any of our models. This issue is a bit longer than normal, as I have included an update on our models performance for 2001. // -- MODEL UPDATE -- // Lowrisk Market Allocation Model signal strength = 9 (on a scale of 0-20, with 20 being the most bullish) *** Disaster Avoidance Strategy - 100% stocks as of 12/06/00 Graduated Strategy - 25% stocks, 75% money markets as of 10/19/2001 Timing Strategy - 100% money markets as of 06/11/2001 SuperBear Strategy - 100% money markets as of 12/14/98 *** I will cover our model's 2001 performance below, but first I want to cover the current market... In Walker MarketEdge issue that we published in early January, I mentioned the recent trading range that the market has been in. The top of that range was around 1173 on the SP500 and 2065 on the Nasdaq. Those areas were important resistance levels for the market, especially on the SP500. After that issue, the market made another run up to those levels...and it was turned away once again as the SP500 made it up to 1176.97 on January 7th. Since then, the SP500 has dropped about 4.2% and the Nasdaq composite had pulled back approximately 7.4%. On Wednesday, both the SP500 and the Nasdaq closed near the bottom of their recent trading ranges. ----- Sidebar ----- (the Walker MarketEdge is the upgraded version of this newsletter. With it you get an immediate FLASH UPDATE whenever there are any changes in our models. In addition, you will get all of our extra issues, *plus* our mutual fund picks. Upgrading your subscription only takes a few minutes at our secure web site: https://www.lowrisk.com/wme-secure.htm ) ----- Sidebar ----- So, where does the market go from here? Well, let's step back for a moment. On the bigger picture, there are two underlying factors. The first is that we are coming off a major bear market (and in the case of the Nasdaq, a truly historic bear market) that bottomed in late September. Second, we have had a very powerful bounce since that September low. In the last three and a half months, the SP500 has rallied more than 24% from low to high, and the Nasdaq has rallied more than 51%. Given those two factors, we have a couple of scenarios here (actually, there are all kinds of scenarios, but most of them are derivatives of the two I will present here)... The first scenario is that after a huge rally, this trading range for the last month is a case of the market digesting those gains. In this scenario, the market has entered a new bull market and this trading range is a case of the market taking a breather before moving higher. Right now it seems like almost everyone favors this scenario, thinking that we are in a new bull market. In fact, the sentiment right now is pretty amazing. For example, the Investor's Intelligence sentiment numbers released last week showed there were fewer bearish advisors than at any time in the last three years! And remember, that three years includes the historic bull market of 1999 and early 2000. Pretty amazing considering that we are less than four months removed from panic lows. The second scenario, and the one we currently favor, is that the market will have some type of a retest of the September lows. That retest might take the form of a pullback that erases anywhere from 30% to 60% of the gains since those lows, or it might take the form of a full retest that heads all the way back down towards the lows. The highs in early December and early January were at significant resistance levels that have now turned the market back twice. At those highs, we had significant bearish divergences on our internal indicators. And last but not least, the turn down came when we had overwhelmingly bullish sentiment. When everyone is bullish, who is left to buy? With all that said, the next few days look like very important ones for the market. On the short term, the market has become extremely oversold...and it is due a nice two or three day bounce. If we do get a rally, it will give us a good clue as to just how much gas is left in the bull's tank. On the other hand, if the market doesn't put together a good bounce in the face of these oversold conditions, then watch for the bears to really take control...a market that can't rally when it is deeply oversold is *not* a healthy market. ============== OK, here are the performance numbers for our various strategies for last year: SP500: -11.9% return, -29.7% maximum drawdown Timing: +5.4%% return, -4.9% maximum drawdown Year by year results: http://lowrisk.com/timing-yearly.htm Graduated: -8.4%% return, -16.7% maximum drawdown Year by year results: http://lowrisk.com/graduated-yearly.htm SuperBear: +3.4%% return, -0.0% maximum drawdown Year by year results: http://lowrisk.com/superbear-yearly.htm Disaster Avoidance: -11.9% return, -29.7% maximum drawdown Year by year results: http://lowrisk.com/disaster-yearly.htm The above returns are based on the SP500, and would be extremely close to what you could have expected if you used an SP500 index fund for your portfolio. Just in case you are not familiar with the term "maximum drawdown", that is the greatest percentage that an account would lose from its peak. For example, consider a scenario where your account started with $5,000, then increased in value to $8,000, and then dropped to $6,000. In this case, the maximum drawdown would be 25% because it fell from $8,000 to $6,000, or 25%. Of our four market timing strategies, the Timing Strategy is by far our most popular. Since we started publishing this strategy "real time" in 1998, it has beaten the SP500 in three out of four years and had a cumulative return of 51.2%. In that time, the SP500 has had a cumulative return of 24.4%. Just as importantly, the Timing Strategy has greatly reduced risk, as the maximum drawdown in that period was 7.9% compared to 29.7% for the SP500. Probably the best performing strategy from a risk to reward standpoint was our SuperBear strategy. This strategy is designed to stay out of the market in all but the most favorable times. It has been out of the market for more than three years. The worst drawdown since we went real time in 1998 has been 4.2%, while it has a cumulative return of 35.3% in that time (versus 24.4% for the SP500). This is a very conservative strategy, and over time it would be very unlikely for it to beat the return of the SP500. However, it is *extremely* likely that the SuperBear strategy will have much lower drawdowns than the SP500. The one strategy that has generated the most confusion and questions from our readers is the Disaster Avoidance strategy. This strategy is pretty much the opposite of the SuperBear strategy...it is designed to stay in the stock market in all but the most dire of times. This strategy remained in the stock market for all of 2001, so its results mirrored the SP500. Perhaps I made a mistake when I named this strategy, as it seems that many people assume that it is a strategy that is going to be out of the market nearly all the time. (our models have been outperforming ever since we introduced them in 1998. Better returns, lower risk...and the only way to ALWAYS know the current status of the models is by upgrading to the Walker MarketEdge. Upgrading your subscription is fast and simple on our secure web site: https://www.lowrisk.com/wme-secure.htm ) Good luck, Jeff Walker Copyright © 2002 by Jeff Walker, Bayfield, CO. This newsletter may be forwarded, as long as you do so in its entirety. Disclaimer: The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. The foregoing has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable. =========================== To SUBSCRIBE: send mailto:wml-sub@lists.lowrisk.com. Or stop by http://www.lowrisk.com/wml-sub.htm -------- jeff@lowrisk.com LowRisk.com- making sense of the market http://www.lowrisk.com --- You are currently subscribed to wml as: alewis@ect.enron.com To unsubscribe send a blank email to leave-wml-1908754N@lists.lowrisk.com
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