Final Stretch

	Elliott Gue PF Newsletter.com
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The third quarter was full of surprises. At the beginning of July, the S&P 500 was just coming off a major late-spring rally. As always, when the market was moving up in spring, many pundits were calling for a "summer rally."

That never materialized, and instead, selling began to pick up steam almost immediately as the third quarter started. Only a last-hour rally in September saved the market from a nasty quarterly performance.

In light of this roller coaster quarter, we're pleased with the Advantage Portfolio's 1.88 percent return, a move that bested the S&P by about 3 percent. That brings our full-year performance to slightly more than 5 percent, far better than the S&P's 1.5 percent gain through the end of September.

The key to the quarterly outperformance was, again, risk management. By using a disciplined stop regime, we were able to keep our losses to a minimum. Specifically, when we recommended adding shorts to the portfolio in August, we were too early; our recommended stops kept those losses to a minimum.

More important, we weren't too early selling out of our big winners. When we originally recommended Compahnia Vale do Rio Doce, we were looking for a move to around $20 ($60 pre-split). Yet, by trailing our stops aggressively higher, we squeezed an additional $1.20 per share out of the trade--the trade wasn't stopped out until early in the fourth quarter for a nice 33 percent gain.

We're preparing a special, free report on risk management and stops for PF subscribers--be on the lookout for that during the next few weeks.

In this issue, we'll review our outlook for the fourth quarter and add one new stock to the portfolio, Western Gas Resources.

A Look Ahead

We continue to see the fourth quarter as the market's best shot for a rally to new 2004 highs. It's not that the economic news is great--so far, the third quarter earnings season hasn't been very impressive.

But consider this: During the past 10 years, only one year saw a negative return for the fourth quarter--that came just after the tech bust in 2000. The average fourth quarter return was 7.4 percent for the S&P, and some of the best years were 2001 and 2002 during the bear market.

Admittedly, this is a small sample size and isn't terribly scientific. But we've seen studies carrying this analysis back into the 1920s, and the fourth quarter effect seems well founded, even during choppy markets like the '70s.

While we'd never advise solely relying on seasonal patterns, it's tough to ignore these numbers. To take advantage of any seasonal move, we're adding one new long to the portfolio this issue, but will remain somewhat hedged through our short recommendation in General Motors.

Crude oil and oil stocks have been in the news a lot lately, but natural gas hasn't received as much attention. That's despite the fact natural gas prices have doubled in just the last few weeks.

Western Gas Resources is a good way to play the move. The company's operations run the gamut from exploration and production of natural gas to marketing and sales.

Almost 90 percent of its revenues come from the sale of natural gas and natural gas liquids--the company should be leveraged to any sustainable uptick in gas prices. Buy Western Gas Resources under 31 with a stop at 26.93.

Finally, despite recent volatility in Bema Gold (see chart), we still like the gold area near term. It's not at all unusual for gold stocks to move violently early in a rally. Bema is still a buy under 3.50 with a stop at 2.35.

Elliott Gue will be available to take your questions until Monday, November 15. Please use the form below to submit your questions.