JAS Market Timing Service

September 24, 1998

Buy Signal Received

Yesterday, in my special telephone update, I alluded to the fact that we were very near a model generated buy signal. I suggested that because of the likely timing of the signal itself, we would be distributing the information with the regular newsletter due out tomorrow. I am happy that I could obtain the necessary updates to my model somewhat earlier than usual and therefore we are delivering this signal to you one day sooner than anticipated. Therefore, to repeat, we have now received an official, model-generated buy signal. This means, that until further notice, the stock market should move sharply higher over the short term. I will go into more detail about this in the newsletter itself tomorrow.

With respect to leveraged instruments, I am not able to recommend them to you at this time. Due to the unprecedented volatility we have experienced in the market, the risk/reward ratio is still unfavorable. Remember that the market never rises as fast as it falls and so the potential for this move up is not as great using leveraged instruments as it will be when the market crashes. I am expecting a large move up now over the short term but not the same kind of move as when the market really crashes. Then I expect a fall of 30% to 50% over a compressed period. When we receive that signal, I will definitely let you know what I am doing with leveraged instruments so that you can use them as well if they fit into your investment picture.

Be aware that although we have received a buy signal in the model, the stock market still is incredibly dangerous looking into the future. I believe, despite the short term picture, that the crash itself will take place relatively soon, perhaps as early as later this year. So we must be prepared. I will keep you posted.

COPYRIGHT, 1998, JAMES A SHEPHERD, INC. ALL RIGHTS RESERVED. ANY USE OTHER THAN AS INTENDED IS STRICTLY PROHIBITED.

RECOMMENDATIONS AND ADVICE GIVEN HEREIN ARE MADE WITH THE EXPRESS UNDERSTANDING THAT SUBSCRIBER ASSUMES ALL RISK OF LOSS. THE COMPANY OR ITS AGENTS GIVES NO GUARANTEE, EXPRESS OR IMPLIED. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. ALL INVESTMENTS CARRY RISK.

The above was the actual signal sent to subscribers.

The update for the following day
expounded on the orginal signal.

James A. Shepherd Market Timing Service Inc.

September 25, 1998

Official Buy Signal

Readings Are Clear

As of late yesterday, we have received an official, model-generated buy signal. This means that powerful underlying forces are at work to move the market sharply higher over the next few months. Of course, this does not mean that we may not have any more negative days. We may indeed, but the main trend now should be sharply higher. Historically, whenever we have received a buy or sell signal in the model, the maximum counter-trend move has been 5%. So this, I believe, would be our maximum risk. In all likelihood though, except for some very short-term turbulence that I will discuss in more detail later in the update, we should be on the road to a surprisingly powerful rally. It is entirely likely, and no doubt shocking to most analysts and investors right now, that we could move to beyond the old highs made in July. I realize that this view may be uncomfortable for you but I must report what I see.

Careful Review of Recent Activity Is In Order

It is necessary to understand how we have arrived at this point. In other words, what is the model telling us? First, let us remember that in mid-July the model was indicating some danger but not an all out sell. Additionally, my short-term historical work and other technical studies were indicating the clear risk of a correction. I advised in my updates in mid-July that the market would soon peak and that a correction was at hand. What I did not anticipate was the confluence of events that made the correction much worse than expected. No one could have foreseen the deleterious effect that the Lewinsky matter would have when combined with other economic worries. There is no way to predict such events. We have, of course, known about the growing problems in Asia and I have written about that threat for months. But except for many other unforeseen events exacerbating that situation, we would have only had a small correction. Now I must emphasize that my service primarily focuses on the major, big cap indices. In fact, I mainly comment on the S & P 500 and the DJIA. Neither of these indices closed with a loss of as much as 20%, which is the benchmark for some analysts to declare a bear market. Of course I am aware that many stocks are down much more than that. But when you analyze those issues, you will find a common thread. Most of the smaller cap stocks that have been hit so hard had already been bid up to ridiculous levels. Many of those companies had never earned a penny and yet were worth billions of dollars. Then, stocks whose earnings were heavily dependent on Asia also were pummeled. That is not surprising. Lastly, many financial stocks that have risk in Russia and Asia were hammered. Yet do not forget that some of these stocks have had unbelievable gains over the last few years. The consolidation in the banking industry has driven many bank stocks to astronomical levels. Is it surprising, considering their obviously shoddy lending practices, that some of that luster has worn off? No. In fact, with evidence now surfacing that many banks have again gotten involved in risky and unwise loans (hedge funds, etc.)they may go even lower as the rest of the market recovers. But they will still be higher than just a few short years ago. But this whole idea of some areas getting decimated is why I prefer to use a broad-based index like the S&P; I do not have to worry about individual circumstances that may affect a particular stock. Rather, the risk of bad news in one or two issues is spread out over many others.

What Should We Do?

It is important to realize that at major turning points, both up and down, we are always going to feel a little uncomfortable. I realize that many of you may be wondering if the fantastic record of the model will continue. Should you hold on, or panic and sell out? Should you stay in cash, as perhaps many of you have done? All I can tell you is that I will, based on much history of the model, act on its signal. That means that any of you who are holding positions that have declined should hold on until advised otherwise. And in reality, except for the situations described above, it would not have been beneficial to sell core holdings and pay taxes just yet anyway. Although I was a little premature in my expectation of a recovery, ultimately I believe that stance will prove profitable. Furthermore, with the model now confirming a recovery, we should be able to look forward to much higher prices soon. So hang in there, I believe the worst is just about over. But I must tell you, unfortunately, that I cannot yet recommend leveraged instruments. The premiums are just too high. Unless that changes, we may not be able to justify positions in this move up and will have to wait for the crash. Remember, the market always falls much faster than it rises and this produces greater gains with leveraged instruments. Although I expect the market to move up sharply, unless the risk/reward ratio improves, using leveraged instruments is too risky. Conversely, when the market is about to crash, we can confidently take deep-out-of-the-money positions in anticipation of a sharp collapse over a compressed period of time. That is where the real profits occur. But right now, unless things change, there is a smaller point move likely over a more protracted period of time. So we must wait and see how things progress.

Interest Rate Reduction Likely

One of the things that will probably help the stock market over the short term is a likely reduction of official interest rates. Greenspan has telegraphed the strong possibility of this. Yet, in reality, he has little choice. Market rates on short-term instruments have fallen to such an extent that the margin between them and official rates is too wide. This disparity cannot exist for long and every time it has occurred, both with interest rates falling and with rates rising, it has produced a reaction by the Federal Reserve. So it is virtually certain that the Fed will act next week to reduce official rates, thereby bringing them into line with existing market rates. They really have very little choice. The only question is, how much will they lower? We will wait and see. In any event, unless they do nothing (which is unlikely) their action should bolster the positive environment in the market over the short term as indicated by the model.

But Don’t You Portray Yourself as A Bear?

Absolutely not! Being a perpetual bear is just as dangerous to one’s financial health as it is to be a perpetual bull. Just ask any of the subscribers to various newsletters whose writers have been bearish over the last ten years. They will tell you of the lost opportunities, etc. No, I am neither a bull nor a bear. I have made a lot of money in both up and down moves. What I am is a pragmatist. I have learned over the years, sometimes through hard experience, that the model is reliable. I believe it will predict the major moves and keep us in the right positions. That is how I can overcome the natural emotional reactions that every human being is subject to when the markets get wild. But to answer the above question further, yes I still do expect a crash fairly soon. Although the short-term picture is bright, there is still much danger. We could slip into a deflationary collapse, for example. If that happens, big cap stocks will lose 30% to 50% in a short time. Smaller cap stocks could lose 80% to 90% of their value. That has been the historical lesson. Yet, fortunately, the model has predicted in advance every one of these relatively rare events. So although this kind of situation is even more likely in view of the current world economic climate, I feel confident that we will know before its impact. Therefore, we have the luxury of not panicking and overreacting to news events. We can sit back and realize that until we get a sell signal, there is little danger of much damage. But, as is obvious to everyone nowadays, things are happening more and more quickly. That is why staying in touch is critical. When we get a signal, or when additional opportunities arise, we must act in a timely manner. These days, with electronic commerce so much a part of every life, getting into position before the herd will be more important than ever. As always, I will keep you posted.

COPYRIGHT, 1998, JAMES A SHEPHERD, INC. ALL RIGHTS RESERVED. ANY USE OTHER THAN AS INTENDED IS STRICTLY PROHIBITED. RECOMMENDATIONS AND ADVICE GIVEN HEREIN ARE MADE WITH THE EXPRESS UNDERSTANDING THAT SUBSCRIBER ASSUMES ALL RISK OF LOSS. THE COMPANY OR ITS AGENTS GIVES NO GUARANTEE, EXPRESS OR IMPLIED. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. ALL INVESTMENTS CARRY RISK.