RESPECT THE PRESIDENTIAL CYCLE (September 10, 2006): Those who don't respect the Presidential cycle are nonetheless condemned to repeat it. This is one of the most reliable of all financial cycles since World War II, in which U.S. equities make an important low every four years, usually in the fourth quarter. The last such nadir was on October 10, 2002. I believe that we are about to experience another important equity bottom in the fourth quarter of 2006, and investors should either therefore substantially reduce their equity holdings, or if folks are in a mood to make real money, to sell short those exchange-traded funds which reliably underperform at this point of the Presidential cycle. QQQQ and SMH are prime examples of such funds which are very liquid, which have almost no cost to sell short, and which could profit by more than 25% in just a few months as technology shares in particular experience their sharpest collapse in the past four years.

GO FOR THE GOLD--ON THE SHORT SIDE (September 10, 2006): A reasonable alternative to selling short technology shares is to sell short the shares of precious metals producers--or sell short the metals themselves. Earlier in 2006, a fund called GDX was introduced which contains a diversified representation of gold producers. Since the annualized management fee of 0.55% exceeds the fund's stated dividends, you are actually being paid to sell it short. More importantly, like the Nasdaq, this fund is likely to lose one fourth or more of its value over the next few months, thus providing an excellent opportunity for short-term gains.

One strong point in favor of selling short GDX is that, like most indices of gold mining shares, this fund tried mightily to break out of its bearish shackles during the past week, and failed miserably. Other gold share funds and indices showed similar patterns, including HUI, the Amex Goldbugs Index of Unhedged Gold Mining Shares. After beginning the week with a sharp gain--HUI reached 369.38 on Wednesday, September 6, 2006--it retreated sharply to close the week at 337.97, down 8.5% from its intraweek high. Throughout 2006, precious metals executives have been unloading their own companies' shares. In the early spring, gold producers issued new shares at the fastest pace since 1987. Meanwhile, the traders' commitments for currencies and metals show commercials completely indifferent toward covering their heavy short positions in gold and silver, and with an all-time record short position in the Australian dollar. Commercials are the most knowledgeable participants in the futures markets, so when they speak, you should listen. The Australian dollar is critical since Australia has such a high percentage of its GDP based upon commodity extraction. So if that country's currency is about to fall sharply, as its commitments suggest, that likely means that the prices of all metals, including copper, silver, and gold, are about to fall precipitously.

How low will they go, exactly? One very useful guide is to observe that on December 2, 2003, HUI reached a peak of 258.60 which was not exceeded for about two years. Another guide is found by measuring the entire gain in HUI from its May 16, 2005 bottom of 165.71 to its May 11, 2006 peak of 401.69. If HUI surrenders exactly 61.8% of this increase--known as the key Fibonacci retracement--it would put HUI at 255.85. It's no coincidence that this number is so close to the number listed above. If history is any guide--which it almost always is--then HUI should move a few percent below each of these numbers, and bottom near 248. That would represent a decline of more than one fourth from current levels.