© 1998 - 2001

BEAR MARKET STRATEGIES

by Robert R. Prechter, Jr.

These strategies are general by necessity. The risks vary, and so does the amount of money required. Your choices
should be guided by your own desire for safety or gain and your belief as to the depth and longevity of the bear
market. Also, be sure to consult The Elliott Wave Financial Forecast and The Elliott Wave Theorist to get a handle
on the current state of the market. Changes can be rapid.

#1 Make sure that your investment capital is not invested “long” in stocks or stock mutual funds, especially in your
retirement plans if switching is restricted.
#2 Two excellent “parking places” for many people are U.S. Treasury bills and money market funds that specialize in
near-term federal government debt instruments. Later, these might be risky, but for now, they should be fine.

#3 A good inverse index fund is Bear ProFund [BRPIX] (Maryland, 888-776-3637), which has a lower minimum
investment than its competitors and allows telephone switches between funds later in the day than its chief competi-
tor. (Call ProFunds and mention EWI to get an expedited prospectus.) Bear ProFund goes up in value as S&P
futures fall in value, and vice versa.

Inverse index funds like Bear ProFund are bets on falling stock prices. Holders of these shares can make more than
50% each time the index gets cut in half, and they typically would lose only 50% of their money if the index
doubles. Bear index funds were by far the best fund investments in 2000, and the stock market has several more
down years to go.

ProFunds offers money funds and “long” index funds too, so you can easily move your money to take advantage of
swings in either direction or “park” it for safety.

If you use a bear fund, you must time your entries and exits well. Reverse compounding can leave you disappointed
if you are early or if the markets are choppy. Here is an example exaggerated for simplicity. Let’s say both the index
and the inverse fund close at 100 today. Tomorrow the index gains 50%, closing at 150, so the fund loses 50% and
closes at 50. Then on Day 3, the index loses 33%, closing back at 100 again, but the fund, in gaining 33%, goes
only to 67 – a seeming performance gap of 37 points.

The reason for the gap is that these inverse funds attempt to mirror the percentage changes in the correlated indexes
on a daily basis, not a long-term basis.

But compounding works to your advantage when markets are trending persistently in your favor. Using our exagger-
ated example again, we start with an index and a fund value of 100. Tomorrow the index loses 50%. The index
stands at 50; the fund at 150. But the next day the index loses 50% again. The index now drops to 25, and the fund
rockets to 225. So the index has lost 75%, but the fund has gained 125%. It’s this last feature that makes bear index
funds like Bear ProFund attractive.
 The Elliott Wave Theorist -- January 6, 2001

To keep your gains, you need to exit at the right time. We recommend that if you use inverse index funds, you buy
them directly from the fund company and apply the saved commissions to a subscription to Steve Hochberg’s Short
Term Update so you can time your purchases and sales. Call the office for information at 800-336-1618 or go to:
www.elliottwave.com/products/stu/index.htm.

Rydex offers the Arktos Fund [RYAIX] (800-820-0888), which moves opposite the NASDAQ 100 Index.

#4 You can also look into an actively managed short fund like Prudent Bear Fund [BEARX] (Dallas, TX 214-696-
5474; see insert), which is designed to benefit from a declining stock market. The fund maintains short positions in
individual stocks and indexes and also buys put options. The fund is about 70% short. This short position typically
does not vary greatly, says president David Tice. The fund maintains some long positions, which account for up to
15% of its assets. Longs include special situations such as certain small cap companies and natural resource stocks
such as gold and silver mining companies. The fund is no-load, about $160 million in size. Mention EWI when you
call, and they will send you an accelerated prospectus. Or, email info@prudentbear.com with EWI in the subject
line. Another good bear fund is the Gabelli Mathers Fund (Bannockburn, IL 800-962-3863). It is conservative, so it
is more attractive if you are unconvinced of the bear’s imminence or severity. The fund also offers tax-sheltered
gains due to tax-loss carryforwards. Visit www.gabelli.com/funds/products/1726.html.
#5 Make sure you are using a safe bank. U.S. banks lend out an average of 75% of their deposits, which means that if
25% of their customers go to the window, they will have payout difficulties. At some, the ratio is more than 80%,
and these banks will be particularly susceptible to runs. Worse, many major national and international banks have a
huge exposure to derivatives such as futures, options and even more exotic leveraged instruments. We are not
experts on banking safety. However, a company named SafeWealth Ltd., which specializes in this field, can help you
(see #9 below). If you must bank in the U.S., SafeWealth says that Farmers’ and Merchants’ Bank (302 Fine Ave.
Long Beach, CA 90802, 562-437-0011) appears to be substantially safer than most, perhaps the safest. We would
add that relatively safe banks may become even safer during difficult times. If they have the sense to inform the
public of their relative safety, depositors in a developing financial crisis will move funds out of weak banks into
stronger ones, making the weak ones weaker and the relatively strong ones stronger. IDC Financial Publishing Inc.
(Hartland, WI, 262-367-7231) publishes quarterly financial ratings that track the financial performance and safety of
all U.S.-based banks and savings and loans ($435 annually). Research reports on individual institutions are $45.
#6 Avoid holding investment real estate. Wait for lower prices. If you consider your home a consumption item (like a
car), and you wish to keep it on that basis, fine.
#7 Cash out your whole life insurance and use term insurance instead. Insurance companies will be hard-pressed to
honor the value of whole life policies when their property and stock investments fall.
#8 Consider a portfolio of short or hedged stocks, managed by an expert. For its short product, Lang Asset Manage-
ment Inc. (Atlanta, 404-256-4100) selects medium-to-large-cap stocks that look overpriced and shorts them, staying
reasonably fully invested. Bob Lang, president, says he looks to build a diversified portfolio of balanced shorts.
Lang’s hedged product gives the manager more latitude under varying market conditions. $100,000 minimum
investment. You select the broker you want or Lang will recommend one. The average return for all of Lang’s short
portfolios for 2000 was 28.65%. Find Lang on the Web at www.langasset.com or email them at
rlang@langasset.com. Mention EWI and receive Bob Prechter’s At The Crest of the Tidal Wave at 50% off. Other
money managers to consider are Skye Investment Advisors LLC (Los Gatos, CA, 408-339-9200) and Kynikos
Associates (New York, 212-292-5800).

#9 Well-heeled investors ($500k-plus) have an interesting option. Whittacat Consulting has set up a market-neutral
strategy designed to make 25%-plus annually regardless of market direction. The idea is to split your portfolio
between two managers, one of them focusing on choosing longs, the other on choosing shorts. The market direction
will be neutralized by the stronger performance of the side the market favors. If you have a market bias, you can tilt
the group by adding an extra manager on the long or short side. All three biases (long, short and neutral) achieved

2
 The Elliott Wave Theorist -- January 6, 2001

25%-plus returns for 2000 against an S&P performance of –10%. The biggest year for the two-manager mix was
1990 (up over 100%). For info, contact Asset Allocation Consultants, Ltd. (P.O. Box 747, Bracebridge, Ontario
P1L1T9, 800-638-5760 or 416-762-2330, or fax 416-762-3793. Website: www.assetallocating.com).
#10 Look for the chance to buy “leaps,” i.e., long-term puts, near the top of each major rally.
#11 If you wish to place $200,000 or more in the very safest institutions in the world outside the U.S., we suggest that
you contact an outside expert in the field: Imogen Collis, President, SafeWealth Services [Switzerland] S.A. World
Trade Center, CP 476, 1000 Lausanne - 30 Grey, Switzerland; +[41]-21-641-1640, fax -1390. (From the U.S., dial
011 first). Email i.collis@safewealthservices.ch.

THE ELLIOTT WAVE THEORIST is published by Elliott Wave International, Inc. Mailing address: P.O. Box 1618, Gainesville, Georgia 30503, USA.
Phone: 770-536-0309. All contents copyright © Elliott Wave International, Inc. 1998-2001. Reproduction, retransmission or redistribution in any form
is illegal and strictly forbidden, as is continuous and regular dissemination of specific forecasts or strategies. Otherwise, feel free to quote, cite or review
if full credit is given.

EWT is published irregularly, one or more times per month. All contents are written by Robert Prechter. Correspondence is welcome, but volume of mail often precludes a reply. For best
results, send concise e-mail to one of the addresses listed on the bulletin board of our web site (www.elliottwave.com).

SUBSCRIPTION RATES: $20 per month (add $1.50 per month for overseas airmail). Subscriptions paid via credit card automatically renew each month. Visa, Mastercard, Discover
and American Express accepted; call our office for other payment options. Delivery available via internet download, email, first class mail and fax, (Call for fax pricing.) Telephone 770-
536-0309 or 800-336-1618, or send credit card number and expiration date with your order. Georgia residents must add sales tax.
We offer monthly and 3-time-a-week commentary on U.S. stocks, bonds, metals and the dollar in The Elliott Wave Financial Forecast; daily and monthly commentary on futures in
Futures Junctures; and monthly commentary on all the world’s major markets in Global Market Perspective. Rates vary by market and frequency. For information, call us at 770-
536-0309 or (within the U.S.) 800-336-1618. Or better yet, visit our website for special deals at www.elliottwave.com.

For institutions, we also deliver intraday coverage of all major interest rate, stock, cash and commodities markets around the world. If your financial institution would benefit from
this coverage, call us at 770-534-6680 or (within the U.S.) 800-472-9283. Or visit our institutional website at www.elliottwave.net.
Send for our FREE CATALOG listing Elliott Wave BOOKS, AUDIO TAPES, SPECIAL REPORTS, PRECISION RATIO COMPASS, and our EDUCATIONAL VIDEO SERIES.
Also, ask about our classroom style Basic Workshop and Advanced Tutorial on the Wave Principle, as well as our periodic International Elliott Wave Conference.

The Elliott Wave Principle is a detailed description of how markets behave. The description reveals that mass investor psychology swings from pessimism to optimism and back in a
natural sequence, creating specific patterns in price movement. Each pattern has implications regarding the position of the market within its overall progression, past, present and future.
The purpose of this publication and its associated services is to outline the progress of markets in terms of the Elliott Wave Principle and to educate interested parties in the successful
application of the Elliott Wave Principle. While a reasonable course of conduct regarding investments may be formulated from such application, at no time will specific security
recommendations or customized actionable advice be given, and at no time may a reader or caller be justified in inferring that any such advice is intended. Readers must be advised that
while the information herein is expressed in good faith, it is not guaranteed. Be advised that the market service that never makes mistakes does not exist. Long term success in the market
demands a recognition of the fact that error and uncertainty are part of any effort to assess future probabitities.