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What the Man Behind the Most Profitable Short Sale Ever Says NowBy
Monday, October 12, 2009
Robert Prechter just closed out the most profitable short sale in history...
Prechter is one of my favorite stock market analysts. He writes a newsletter called the Elliott Wave Theorist. Over the past three years, the advice in his newsletter has been sublime. Prechter is pessimistic. He thinks America is heading into the worst depression in 300 years... the worst since the founding of the American Republic. Doug Casey, founder of Casey Research, is another bear. He jokes Prechter is the only analyst who thinks things will be worse than he does. Prechter makes his stock market predictions by studying America's social mood. When he expects an improvement in the social mood, he'll predict a rise in the stock market. When he sees Americans becoming pessimistic, he turns bearish. In 2007, for example, America was feeling more prosperous than ever before. But problems were beginning to appear... especially in the real estate market. House prices had peaked a year earlier, and the credit markets had started to lock up. New Century Financial collapsed in March 2007. Prechter knew these problems would infect America's social mood. On July 17, he told his readers to expect a major decline in the stock market: "Aggressive speculators should return to a fully leveraged short position now," he wrote. Here's another example: In February 2009, the stock market had fallen 58%, the largest bank in the world, Citigroup, was on the brink of bankruptcy, and Wall Street was in total panic. The daily sentiment index was registering 3% bulls for the S&P 500. In short, the social mood was the darkest it had been since the 1970s. Prechter sensed a turning point. On February 23, Prechter told readers to expect a strong bounce in the stock market and advised them to close out their short positions. "To be successful," he said, "you have to sell when people love 'em and buy when they don't." Prechter claims selling the S&P in July 2007 and closing the position in February 2009 was the most profitable short sale in history. "This [800-point profit]," he says, "is surely the largest number of points that anyone has ever made, or will ever make, in the S&P futures in 19 months, and maybe ever." Less than two weeks after I'd received this letter, the social mood turned positive and the stock market started a record-breaking rise. Here's what Prechter predicted this new trend would do to America's psyche... "Regardless of its extent, [the rally] should generate substantial feelings of optimism. At its peak, the President's popularity will be higher, the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system, and investors will be convinced that the bear market is behind us." As I write, seven months later, the S&P is up over 60% from its lows... As Prechter warned, a wave of optimism is washing across the investment community. Except for his remark about the President's popularity, which is waning, Prechter's description of the social mood in America could not have been more accurate. Thing is, Prechter has now turned bearish again. The S&P has rallied to his target area of 1,000 to 1,100, and he says a new turning point in the social mood is at hand. In his August issue, he advised his clients to get bearish again... "Investors should continue to keep the bulk of their wealth in cash and the safest possible cash equivalents, in the safest institutions," he writes. "If you actively invest in the stock market with money you can afford to put at risk, it's time to return to the short side." Although it's worth noting Prechter's pessimism, I wouldn't bet against the market until it displays a bit of weakness – like if the S&P 500 fell to its lowest low of the past month (around the 1,025 area). This ensures you're betting with the short-term trend, rather than against it. Good investing, Tom P.S. Prechter's analysis of social mood and trends is a great read. You can visit his website here: Elliottwave.com. I also recommend his most recent book, "Conquer the Crash." It tells you the best ways to invest in cash, and includes a list of the safest banks in America. Market Notes
NEW HIGHS OF NOTE LAST WEEK
Banro (BAA)... gold Gold Fields (GFI)... gold Agnico-Eagle (AEM)... gold Keegan Resources (KGN)... gold International Tower Hill Mines (THM)... gold Ivanhoe Mines (IVN)... copper and gold Silver Wheaton (SLW)... silver royalties Silvercorp Metals (SVM)... silver mining Freeport-McMoRan (FCX)... copper and gold Amazon (AMZN)... online retail Apple (AAPL)... iPods, iPhones, and computers Google (GOOG)... search engine IBM (IBM)... all things tech Petrobras (PBR)... Big Oil StatoilHydro (STO)... Big Oil Halliburton (HAL)... oil services Transocean (RIG)... oil services BJ Services (BJS)... oil services Nabors Industry (NBR)... oil services Diamond Offshore (DO)... oil services Rowan Companies (RDC)... oil services National Oilwell Varco (NOV)... oil services Chicago Bridge & Iron (CBI)... infrastructure Starbucks (SBUX)... expensive coffee Nordstrom (JWN)... expensive clothing Whole Foods (WFMI)... expensive groceries Thai Fund (TTF)... rally in Asia iShares Australia (EWA)... rally in Australia iShares Germany (EWG)... rally in Europe iShares Brazil (EWZ)... rally in South America
NEW LOWS OF NOTE LAST WEEK
It's hard to hit a new low in this market. |
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