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Short-Term Update

(December 8, 2004)

Please note that we switched to a 50% long position from a 100% long position in our DJIA Timing System last Friday at 10,592 (at a 118-point profit).  We currently are still holding a 50% long position but this author is looking for strength tomorrow to shift to a neutral position in our DJIA Timing System.  Again, all transactions in our DJIA Timing System will be posted on the "Special Alerts" section in our discussion forum as soon as we have made the trade.  For your convenience, all our prior transactions in our DJIA Timing System are shown on there as well.

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Important news: I will be leaving for Hong Kong on December 19th and will not be back until January 7th, 2005.  I will try very hard to update my commentary during that time - but my current publishing schedule is December 18th, December 26th, and December 28th.  My partner will be in Los Angeles from December 29th to January 5th so I don't anticipate updating our website after December 28th until I get back from Hong Kong on January 7th.  I am also planning to speak to a few investment professionals while I am in Hong Kong and will appreciate it if our readers can act as a reference or recommend people that I can speak to (and which hopefully we can put up as another "interview" on our website) - on topics such as the future economic direction of China, Hong Kong, and her relationship with the United States, etc.

After taking a beating yesterday (Tuesday), the market staged a mediocre rally today, as evident by very weak internals such as advancers vs. decliners, and upside/downside volume on both exchanges, etc.  Moreover, the recovery points-wise on the DJIA, NASDAQ, S&P 500, 400, and 600 (with the exception of the Dow Transports) was weak - implying practically no leadership to speak of.  Volume on the NASDAQ today was also not particularly strong.  Total volume today was 2.4 billion shares, while yesterday's volume was over 2.7 billion shares.  It is also interesting to note that 580 million of those shares traded today were shares in SIRI (with the stock losing 23%) while "only" 400 million of those shares traded yesterday were shares in SIRI (on a gain of 11%).

The one big disappointment has been the lack of a positive response from both the MSFT's $32 billion one-time dividend distributed on Thursday evening and the positive Intel announcement on the same night.  The combination of these two positive items should have given the market a sizable rally on Friday - that did not materialize.  The fact that the market declined substantially on Tuesday on practically no news (except with a small decline in oil prices which "should" have been positive for the stock market) makes this now a more bearish omen. 

As we outlined in our weekend commentary, the technicals have been deteriorating for the last week or so - while optimism among the public has remained strong or has even been increasing.  For example, the equity put/call ratio has stayed relatively low (except for today's reading - which is more of a neutral reading), while the percentage of bulls in both the Investors Intelligence and the American Association of Individual Investors surveys has stayed relatively high.  More importantly, the latest reading in the Investors Intelligence Survey (which has just been updated) is cause for concern.  Remember the statement that I have made over the last two weeks?  In my weekend commentaries during the last two weeks, I stated that the relatively high readings in the Investors Intelligence Survey should not be a concern as long as "it [the Bulls-Bears Differential] does not get too out of hand, such as a reading of 40% or over."  Well, we are not there yet, but we are definitely close.  The latest Bulls-Bears Differential in the Investors Intelligence Survey is a reading of 39.1%, the most optimistic reading since the reading on March 3rd earlier this year (followed by a subsequent decline of greater than 500 points in the DJIA over the next three weeks):

DJIA vs. Bulls-Bears% Differential in the Investors' Intelligence Survey (January 2003 to Present) - While I still believe the cyclical bull market is intact, the latest rise in the Bulls-Bears% Differential in the Investors Intelligence Survey from 34.4% to 39.1% this week is probably a bit excessive - especially in light of the recent weakness in the stock market.

Sentiment can best be applied as a contrarian indicator when the public is getting more bullish even in the midst of stock market weakness (or more bearish in the midst of stock market strength).  We are currently in the first scenario, per the readings in the Investors Intelligence Survey.  Readers please take heed.

The results of the survey for the American Association of Individual Investors will be released tomorrow, and I will provide an update of that survey to our readers this weekend.

Now that we are on the subject of bearish news, I believe my readers would be interested in this warning from the NASD regarding homeowners taking out equity from their homes to invest in the stock market.  Readers who have been reading my past commentaries and my posts in our discussion forum may know my stance on housing and housing prices - that the next cyclical bear market in equities will be accompanied by a bear market in housing and housing prices as well.  In the next downturn, the marginal homeowners will be squeezed out, not only because income will be down and unemployment will rise, but also because of a downturn in their equity investments where the source of the funds are from home equity loans.

In light of what happened in the commodity markets in the bond market today, I believe something should be said about it.  Spot gold prices tanked $14.70 (3.3%), while silver tanked nearly 10% and platinum declined over 4%.  The U.S. Dollar Index also had a good rally, although it gave back a significant chunk of those gains towards the close.  The steel and the copper stocks continue to go down, and the yield on the 10-year treasuries and the 30-year treasuries were down 9.4% and 11.6%, respectively - very sizable movements any way you look at it.

What is going on?  The yield curve continues to flatten (I would recommend shorting CFC here), while commodity stocks continue their downtrends despite continued high demand from China.  The consensus is that there will be no landing at all for China, but Jim Rogers had different things to say.  Is this cyclical bull market maturing?  Dear readers, I will try to provide the answers to these questions in this weekend's commentary, but bull market or bear market, I believe we will be able to navigate this market successfully for the sake of our readers.  For now, I can only give you this advice: Stop losses on every trade!

Signing off,

Henry K. To, CFA

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