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Prologue to Beat the Market: Win with Proven Stock Selection and Market Timing Tools

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Gerald Appel recalls the vicious bear market of 2001-2002, and how the two indicators that signaled that it was time to re-enter the stock market are just as valid today.
This chapter is from the book

A Signal for a New Bull Market Is Given...

The time is September 6, 2002. The stock market is in the final throes of one of the most vicious bear markets in history—a bear market that has already taken the Standard & Poor’s Index down by 47% from its early 2000 peak levels, and which has lopped 77% from the Nasdaq Composite Index.

Pessimism is rampant. Investors have seen serious damage done to their personal savings, to their retirement plans, and to their asset base in general. Many mutual funds have shut down or merged. A war with Iraq looms on the horizon, adding to the general uncertainty.

However, two indicators—indicators that measure the value of stocks compared to the values of alternative investments—flash the all-clear signals that the time has come to enter into the stock market with full force; signals that stocks are once again bargains; signals to buy and to buy now!

And, as matters turned out, these proved to be very timely signals, indeed. The buy signals that these two indicators produced on September 6, 2002, were followed by a market advance that did not come to an end until October 9, 2007. At that time, the Standard & Poor’s 500 Index had risen from 893.92 to 1565.15—a gain of 671 points or 75.1%.

However, by July 13, 2007, three months before the final peak, trouble had begun to appear on Wall Street. A rash of defaults in the mortgage industry had spread to financial institutions across the globe as it became apparent that lenders had extended far too much credit to far too many borrowers who did not have the capacity to repay. As the financial community reeled, losses mounting as a result of a rash of defaults—with major institutions, such as Citicorp, ultimately losing half their value—the stock market turned down, losing 9.4% in just four weeks.

What were the indicators that had placed investors into the stock market in 2002 suggesting at this juncture? They steadfastly retained their bullish status, maintaining their favorable outlook throughout the July–August 2007 decline. This optimism was rewarded as the Standard & Poor’s 500 Index recovered to new highs on October 9, less than two months after the lows of August.

The past history of these “value indicators” had been marked by stock market declines of up to 17%, even while their status remained favorable. These measures of stock market value were not designed for in-and-out trading but rather to alert investors as to when stocks represented or no longer represented favorable value. History has shown that when stocks are still “inexpensive,” market declines do not last for very long.

Following the October recovery, which brought many popular market indices to new all-time highs, pessimism quickly returned, with subsequent market declines reaching the area of 18% in January 2008—still barely within but threatening to violate past boundaries of risk.

However, stocks DID recover, after one final dip in March, reclaiming by mid-May most of the losses taken at the start of the year.

As matters had turned out, the stock market had found support within the normal range of market fluctuation implied by the indicator set that had called, with such accuracy, the end of the bear market, and had kept its followers in stocks all through the 2002–2008 period. These indicators had been bent by the “sub-prime credit crisis.” However, they did not break.

The two indicators that measure stock market value have been combined into one key indicator: the “Twin Bond–Stock Valuation Model,” which has been generating accurate signals since 1981. You will learn in this book all you need to know to assess the stock market by way of this timing model so that you, too, can identify key market turning points of the sort that took place during September 2002.

Please join me as we explore the procedures involved.

Gerald Appel

July 2008

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