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Measured from the October 2002 low, the current bull market is now 26 months old. How have BCN Advantage clients faired? First, it’s important to remember our very accurate evaluation at the time: “Despite the looming war and dismal economic news, our confidence is growing. We believe the October 2002 lows will prove to be the bottom of this historic bear market.” (BCN Advantage 2002 Annual Report) We translated that analysis into action, moving our clients 100% into the market in mid-August 2002. We moved to cash ahead of the war, but our indicators turned so strongly positive in mid-April 2003 that we moved 60% into the market BEFORE the end of “major military operations” and 100% into the market by the end of May, long before conventional wisdom recognized this current bull phase. The Nasdaq stood at 1472, the DJIA at 8454 and the S&P 500 at 916. The first 9 months of 2004 were characterized for the most part by a consolidation phase (more about this in a moment), but the market did display some very disturbing behavior: the Nasdaq fell from its January 26th high of 2154 to its August 12th low of 1752, a decline of 19%. BCN Advantage clients were largely out of way, because we moved 60% to CASH on April 29th. Through late summer and early fall, the markets gave so many head-fakes and false signals that our October 4th move 100% into the market was greeted by several howls of protest. With the election still three weeks away (and too close to call, making a Florida repeat likely) and oil at $55 a barrel, the emails and phone calls were non-stop. The Nasdaq stood at 1942, the DJIA at 10,192 and the S& P 500 at 1131. Today’s 2.2 year-old bull market compares with an average length of 2.6 years for the 15 bull markets that have occurred over the past 75 years. So one could hardly call this a “young” bull market, and we have to evaluate very carefully the key factors that could propel (or derail) this bull phase in the coming months. The Fed began its current round of rate increases on June 30, 2004, and to date has completed 5 “measured” rate hikes of ¼ point each, bringing the federal funds rate to 2.25%. Historically, interest rate hikes take six months to sink their teeth into corporate earnings and precipitate a market decline… just about where we are right now. But remember, we are coming off the lowest interest rates since 1961. The Fed moves – so far – have brought short term rates roughly even with annual inflation (a neutral stance) and have barely budged 5 and 10 year rates. Oil above $40 a barrel will remain a drag on the economy and could severely limit stock market gains during 2005. On the other hand, high oil prices, because they impact the economy in much the same way as high interest rates, could provide the Fed with the justification to keep interest rates low – or at least to keep future rate hikes “measured.” Keep in mind that market breakouts and big new up trends NEVER begin in perfect, worry-free environments. Oil speculation and concern over future interest rates have all the hallmarks of the “wall-of-worry” that markets like to CLIMB. 2004 provided a reminder of the importance of global diversification. Of the 23 stock markets around the globe, the United States lagged all but four. Factoring in currency gains, the U.S. market came in dead last, because of the declining dollar.