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From Pessimism to Optimism

November 22, 2002

On October 4, this commentary posted A Stock Market That Can’t Catch a Break, which outlined the terrible beating stocks were taking. On October 10, however, stocks began a rally and in only nine days gained some 17%. The following six weeks saw prices inch higher, but ominously most of the major indexes developed near-perfect "head and shoulders" formations, which often portend lower prices.

Richard Russell had noted, however, that if the Dow Industrials bettered their November 6 high of 8771, the "head and shoulders" formation would be invalided and the rally that began on October 10 could continue for sometime. Yesterday, the Dow Industrials surged 222 points to close at 8845. So, it looks like stocks could enjoy another day in the sun before continuing their downward trend.

Although Russell has told his more aggressive subscribers that the rally can "be played" by buying Diamonds, a trust that tracks the Dow Industrials, he warns them to keep close stops to protect against a reversal in direction. Russell says that stocks are still in a primary bear market and that the present rally is only a "bear market rally," even if a strong one. He makes no predictions when it will end.

A most amazing thing about recent stock market action was how quickly investor sentiment changed. When stock prices were collapsing in September and early October, pessimism abounded. Gloom was everywhere (except the speculators who had shorted stocks). Now, optimism is prevalent--after only six weeks of rising prices.

When prices were collapsing, many investors were praying for a rally so they could get out. However, the rally has changed all that. They are bulls now, with no plans to sell. The bull is back, right? Actually, the quick reversal to bullishness is a sign that the bear market is still in place.

When a genuine bull market in stocks--not a bear market rally--starts, it will grow out of massive and extended doom and gloom. Investor sentiment will not change quickly. Prices will work their way higher slowly, and most investors will miss the new bull because the bear market will have emotionally destroyed them.

The biggest stock market upside moves often come as bear market rallies, such as what we saw off the October 9 lows. There is no way of knowing when this rally will end, but end it will. Then the bear will shred some more portfolios, and investors will lament not having sold stocks during this bear market rally.

Bear rallies give investors hope that a new bull market has begun, that they will again enjoy the profits that the bull market provided. Investors need to separate themselves from the emotion that is driving this market. That is the way a bear market traps investors. Look at the facts and invest accordingly.

Meanwhile, gold and silver prices are stuck. Gold cannot top $325 and silver is mired at $4.50. If prices were rising--as stock prices did in the 1990s, the metals’ upside potential would not be doubted. Investors would simply buy based on price action. However, the bull market in gold and silver is embryonic and is not recognized by most analysts and investors.

Readers need to keep in mind that when the masses flock to an investment, the profit potential is small--if any profit potential is left. The metals are better investments than stocks, despite the price action.

Call CMI at 1-800-528-1380 for answers to any questions or clarifications.  Our hours are 7:00 a.m. to 5:00 p.m. Mountain Standard Time, Mondays through Fridays.  Our offices are in the middle of the Phoenix, Arizona financial district.  CMI has had the same bank account since its inception in 1973.  References available on request.  http://www.certifiedmint.com

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