Most Important Chart

by Charles Meek
December 08/05

Dow Jones Industrial Average 10,912
Value Line Arithmetic Index 1,937
30-Year Treasury Index 4.73%
Gold 1/10 Ounce $50.17

The Big Picture for Stocks
The 4-year cycle is negative into 2006.

Technical Trendicator (1-4 month trend):
Stock Prices Down
Bond Prices Up
Gold Price Up

The Markets
Our model is proving accurate on bonds and gold, both being in positive uptrends including the fairly new buy signal on bonds. Having missed this rally in the stock market over the last few weeks, it is too late to chase it now—except for various special situations. This bull market is long in the tooth. As I listen to commentators tell why they like stocks, what I think I am hearing is that the market should keep going up because it has been going up. Not a good enough reason for me.

Some people are pointing out that p/e ratios are lower now. But my study of market cycles suggests that it is normal for p/e ratios to drop just before a bear market. The reason is that near the top of a business cycle, earnings take a big jump relative to share prices. But the astute investor anticipates the downward cycle in earnings that will likely follow.

Below is perhaps the most important chart one could consider about the current state of the stock market (from Ned Davis Research via Merrill Lynch). It shows where we are in the long term (“secular”) cycle. Note the previous three periods highlighted in bold. The chart indicates periods of some 15 or more years where the broad stock market makes no net progress. If history is a judge, we are in one of these periods again.

The chart shows a trendline in the Dow at 9.7% gain per annum. Note that in each of the three past similar periods, the market eventually gets below its trendline. So far, it has remained above it. It is highly likely that history will repeat and there will be a much better buying opportunity down the road.

I am personally about two-thirds in cash equivalents, waiting better buying opportunities down the road. Long positions include metals/mining shares and deeply undervalued special situations such as the one below. Right now we are looking for tax-bounce candidates as well. The average return of all closed positions from this Special Situations list remains in excess of 100% per annum.

Special Situations Update
CVF Technologies (CNVT, $.25) reported the sale of one of its portfolio companies, Gemprint. They will get $3.5 million cash plus royalties from the sale. The estimated net asset value of CNVT now looks to be around $.90 per share. I think a small unknown closed-end investment company ought to sell at least at 60 to 70% of NAV, which would put the stock at $.54 to $.63. Accordingly, I am raising the target on the stock to $.54. The company will now have cash to buy back some of its shares if it chooses to do so, which should help give the company a boost.
Note: We are long CNVT in accounts we manage.

Charles Meek
MeekMarketModels.com

Mr. Meek is a Registered Investment Advisor. He is the editor of MeekMarketModels.com and manages Persimmon Capital Partners, L.P. a Texas hedge fund.

Meek Market Models, Inc. does not guarantee the accuracy or completeness of this report, nor do we assume any liability for any loss that may result from reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are for general information only. In making any investment decision, you will rely on your own review and examination of the facts and the records relating to such investments. Trading the market is extremely risky. Our suggestions are often very speculative and not suitable for many investors. Past results are not indicative of future returns. Meek Market Models, Inc.