...............................................

       W a l k e r   M a r k e t   L e t t e r

               January 17th, 2002

            http://www.LowRisk.com


...............................................


Our model's Signal Strength is at 9 (on a scale of 0-20).
There are no changes in any of our models.

This issue is a bit longer than normal, as I have included
an update on our models performance for 2001.


       // -- MODEL UPDATE -- //

Lowrisk Market Allocation Model signal strength = 9 (on a scale
of 0-20, with 20 being the most bullish)

***
Disaster Avoidance Strategy - 100% stocks as of 12/06/00
Graduated Strategy - 25% stocks, 75% money markets as of 10/19/2001
Timing Strategy - 100% money markets as of 06/11/2001
SuperBear Strategy - 100% money markets as of 12/14/98
***

I will cover our model's 2001 performance below, but first I
want to cover the current market...

In Walker MarketEdge issue that we published in early
January, I mentioned the recent trading range that the
market has been in. The top of that range was around  1173
on the SP500 and 2065 on the Nasdaq. Those areas were
important resistance levels for the market, especially on
the SP500.

After that issue, the market made another run up to those
levels...and it was turned away once again as the SP500 made
it up to 1176.97 on January 7th. Since then, the SP500 has
dropped about 4.2% and the Nasdaq composite had pulled back
approximately 7.4%. On Wednesday, both the SP500 and the
Nasdaq closed near the bottom of their recent trading
ranges.

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      ----- Sidebar -----


So, where does the market go from here? Well, let's step
back for a moment.

On the bigger picture, there are two underlying factors. The
first is that we are coming off a major bear market (and in
the case of the Nasdaq, a truly historic bear market) that
bottomed in late September. Second, we have had a very
powerful bounce since that September low. In the last three
and a half months, the SP500 has rallied more than 24% from
low to high, and the Nasdaq has rallied more than 51%.

Given those two factors, we have a couple of scenarios here
(actually, there are all kinds of scenarios, but most of
them are derivatives of the two I will present here)...

The first scenario is that after a huge rally, this trading
range for the last month is a case of the market digesting
those gains. In this scenario, the market has entered a new
bull market and this trading range is a case of the market
taking a breather before moving higher.

Right now it seems like almost everyone favors this
scenario, thinking that we are in a new bull market. In
fact, the sentiment right now is pretty amazing. For
example, the Investor's Intelligence sentiment numbers
released last week showed there were fewer bearish advisors
than at any time in the last three years! And remember, that
three years includes the historic bull market of 1999 and
early 2000. Pretty amazing considering that we are less than
four months removed from panic lows.

The second scenario, and the one we currently favor, is that
the market will have some type of a retest of the September
lows. That retest might take the form of a pullback that
erases anywhere from 30% to 60% of the gains since those
lows, or it might take the form of a full retest that heads
all the way back down towards the lows.

The highs in early December and early January were at
significant resistance levels that have now turned the
market back twice. At those highs, we had significant
bearish divergences on our internal indicators. And last but
not least, the turn down came when we had overwhelmingly
bullish sentiment. When everyone is bullish, who is left to
buy?

With all that said, the next few days look like very
important ones for the market. On the short term, the market
has become extremely oversold...and it is due a nice two or
three day bounce. If we do get a rally, it will give us a
good clue as to just how much gas is left in the bull's tank.
On the other hand, if the market doesn't put together a good
bounce in the face of these oversold conditions, then watch
for the bears to really take control...a market that can't
rally when it is deeply oversold is *not* a healthy market.

==============

OK, here are the performance numbers for our various strategies
for last year:

SP500: -11.9% return, -29.7% maximum drawdown

Timing: +5.4%% return, -4.9% maximum drawdown
Year by year results: http://lowrisk.com/timing-yearly.htm

Graduated: -8.4%% return, -16.7% maximum drawdown
Year by year results: http://lowrisk.com/graduated-yearly.htm

SuperBear: +3.4%% return, -0.0% maximum drawdown
Year by year results: http://lowrisk.com/superbear-yearly.htm

Disaster Avoidance: -11.9% return, -29.7% maximum drawdown
Year by year results: http://lowrisk.com/disaster-yearly.htm


The above returns are based on the SP500, and would be
extremely close to what you could have expected if you used
an SP500 index fund for your portfolio.

Just in case you are not familiar with the term "maximum
drawdown", that is the greatest percentage that an account
would lose from its peak. For example, consider a scenario
where your account started with $5,000, then increased in
value to $8,000, and then dropped to $6,000. In this case,
the maximum drawdown would be 25% because it fell from
$8,000 to $6,000, or 25%.

Of our four market timing strategies, the Timing Strategy is
by far our most popular. Since we started publishing this
strategy "real time" in 1998, it has beaten the SP500 in
three out of four years and had a cumulative return of
51.2%. In that time, the SP500 has had a cumulative return
of 24.4%. Just as importantly, the Timing Strategy has
greatly reduced risk, as the maximum drawdown in that period
was 7.9% compared to 29.7% for the SP500.

Probably the best performing strategy from a risk to reward
standpoint was our SuperBear strategy. This strategy is
designed to stay out of the market in all but the most
favorable times. It has been out of the market for more than
three years. The worst drawdown since we went real time in
1998 has been 4.2%, while it has a cumulative return of
35.3% in that time (versus 24.4% for the SP500). This is a
very conservative strategy, and over time it would be very
unlikely for it to beat the return of the SP500. However, it
is *extremely* likely that the SuperBear strategy will have
much lower drawdowns than the SP500.

The one strategy that has generated the most confusion and
questions from our readers is the Disaster Avoidance
strategy. This strategy is pretty much the opposite of the
SuperBear strategy...it is designed to stay in the stock
market in all but the most dire of times. This strategy
remained in the stock market for all of 2001, so its results
mirrored the SP500. Perhaps I made a mistake when I named
this strategy, as it seems that many people assume that it
is a strategy that is going to be out of the market nearly
all the time.


      (our models have been outperforming ever since we
      introduced them in 1998. Better returns, lower
      risk...and the only way to ALWAYS know the current
      status of the models is by upgrading to the Walker
      MarketEdge. Upgrading your subscription is fast
      and simple on our secure web site:

      https://www.lowrisk.com/wme-secure.htm )



Good luck,
Jeff Walker


Copyright (c) 2002 by Jeff Walker, Bayfield, CO. This newsletter may
be forwarded, as long as you do so in its entirety.

Disclaimer:
The financial markets are risky. Investing is risky. Past
performance does not guarantee future performance. The
foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical
research and data believed reliable, but there is no
guarantee that future results will be profitable.


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jeff@lowrisk.com

LowRisk.com- making sense of the market  http://www.lowrisk.com



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