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The Alchemist (05/13/2007)
By Al Thomas

New Dow Highs

Not only the Dow Jones Industrial Average is making new contract highs, but also the Transportation Index and the Standard and Poor's 500 Index.

What does this mean?

History is a great teacher if the investor will take time to do the home work. Let's hope our fund managers do theirs. They are managing the money for millions and millions of people. About 50% of U.S. households own stock and most of that is in some type of tax sheltered retirement plan such as a 401K. Most of these managers have not seen a major bear market; they are too young.

We saw what they did to accounts during the 2000 - 2003 break. Those stockholders can only hope the money managers (I call them manglers) have gotten smarter since then, Personally, I doubt it.

The market now is signaling that it wants to make many more new high closes, but the yellow caution flag is waving. Stay carefully invested. We have seen the DOW up 20 of the last 22 sessions. Let's look at history.

On August 1, 1927 the DOW ended a string of 19 new high closes of 21 sessions.

On July 5, 1929 the same run of 19 new highs of 21 trading days occurred. The latter was only 2 months before the start of the great "Crash of ‘29".

The first run was the bait thrown out to lure the suckers out of their nests and the second extracted what money was left in their wallets. Margins then were only 10% so it can seen why the little guy managed to lose every thing.

Mr. Investor (I usually called him Joe Sixpack, but they didn't have six packs then) could buy 100 shares of $10 stock worth $1,000 for $100 deposited at his brokerage company. A 10% move and he either doubled his money or went broke. This is the same leverage you will find in commodity futures today.

Because of the euphoria of the up, up, up 1928, 1929 market speculators were mortgaging their homes to gamble in the stock market. Today margins are 50% and folks seem to be smart enough not to be playing the market.

As the market churns higher and higher it will draw more investor/speculators into it. The other speculation - real estate - has turned sour and is not as attractive as it once was. They may choose a fund manager who does not understand bear markets (most don't) and they will lose a substantial portion of their funds. During the 2000 - 2003 debacle many lost 40% to 60% and more.

All the investing lights are green at the moment, but do not ignore the yellow flag. It is not known when the market will turn down, but it will. The bear is only hibernating.

Unless you have your exit strategy in place now your money will be eaten when the bear again emerges from his cave.

Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter at www.mutualfundmagic.com to discover why he's the man that Wall Street does not want you to know. Copyright 2007 All rights reserved.

 

 

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