Thursday, September 29, 2005


The reverse play in football can be very exciting. There are many versions and flavors of the play, but in its simplest form, the play starts of with the offense moving to one direction. The offense hopes that the defense will follow this motion and that defensive players’ designated to “stay home” and be ready for the reverse will be faked out by the offensive motion.

So in its essence, the reverse play is betting on the defense screwing up. As investors, we wish to avoid screw-ups. The market has reversed and we must not chase the motion and blow the defense.

The Author reported a couple of days ago that market indicators had reversed. And as of today, September 29, 2005, they continue to turn negative[i]. So it is time to move to a wealth preservation posture. For many investors, this means more cash and defensive, high-dividend stocks. For more nimble investors and aggressive investors, the mix can include inverse funds and more foreign equity exposure, as well as cash and defensive stocks.

The Author is in the process of transitioning his portfolio into a defensive mode. He will share some proposed allocations that generally reflect the direction of his portfolio in response to this reversal and the larger Secular Bear Market.

Author’s Target Portfolio:

20% Gold. This is new territory for the Author. He has never owned gold or a gold fund. And the Author is not sure that gold will continue its run, but the technical charts look good and the Precious Metal Sector has good relative strength. With this investment the author is following one of the key tenets of his investment philosophy. “Never argue with the tape (or chart)”, ala Jesse Livermore[ii].

The Author’s gold holding is IAU, a Comex Gold Index Exchange-Traded Fund. The fund tracks gold prices and, as an ETF, trades on the AMEX exchange.

20% Value Stock. These could be held as individual stocks or through a value stock mutual fund. Avoid value stock ETFs right now. In these markets, you need a fund manager with good value stock picking skills.

10% Rydex S&P 500 Inverse Fund. This particular fund is 200% inverse to the S&P 500, so in effect 20% of the portfolio is “shorting” the S&P 500.

10% Rydex NASDAQ 100 Inverse Fund. This particular fund is 200% inverse to the NASDAQ, so this “shorts” the index as 20% of the portfolio. CAVEAT: The NASDAQ Index the Author follows has not yet reversed, so this investment may be contingent on a reversal.

30 to 40% cash. This component could also include some foreign exposure. However, three ETFs the author tracks, the Latin American 40 ETF (ILF), the EAFA Emerging Markets Index (EEM), and the EAFA Foreign Index (EFA) are much extended on their charts. The Author will watch these ETS but will only consider buying on pullbacks.

As always, these are suggestions, not recommendations. Your investments should be based upon your individual needs and analysis. This proposed portfolio is offered only for your study.

Every Day Above Ground is a Good Day in the Desert of the Real!

IMPORANT DISCLAIMER: This newsletter is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed in this newsletter.
[i] This reversal is despite the fact that all market indices were up around a point or so today, 9.29.05.
[ii] Jesse Livermore was one of the greatest stock speculators of the early part of the 20th century. Much of his philosophy is contained in the book, “Reminiscences of a Stock Market Operator.” It is good book for the advice and the market aphorisms. But it is also interesting from an historical perspective. If one believes the stock market is corrupt and “rigged” now, prepare to be shocked to see what it was like before the Great Depression.