Q & A : Investor Sounds the Warning for Stock Pullout : Pointing to Market Changes, Huntington Beach Newsletter Says Now’s the Time to Sell

Douglas Fabian’s investment newsletter told subscribers to get out of the stock market before the October, 1987, crash. And it told them to get out again last week.

The Huntington Beach-based newsletter, Fabian’s Investment Resource (formerly called the Telephone Switch), uses a mathematical formula to time the buy and sell decisions it recommends. It has been ranked No. 1 nationally in predicting major ups and downs in the stock market over the past 12 years by independent monitor Hulbert Financial Digest.

The newsletter is closely watched by its 35,000 subscribers, mostly small investors with about $1 billion in stocks and mutual funds. With the Dow having fallen nearly 200 points in the past two weeks, the question of whether to pull out of the market is foremost on the minds of those who pay $137 a year for his financial suggestions. The Dow Jones industrial average rose 4.32 points Wednesday, to close at 3,679.73. That’s roughly 300 points below its Jan. 31 high.

Speaking from his shuttered third-floor office in a tone that often takes on the sound of a confidential whisper, Fabian shared some investment advice with Times staff writer Anne Michaud.

Q: You sent the sell signal on Thursday, March 31?

A: Wednesday evening. Wednesday’s market action is what caused us to go into a sell mode. Thursday was actually an “up” day in the market.

Q: Why did you advise people to sell?

A: I’m trying to get double-digit returns on my investments, and for that, the market is no longer safe.

One of the things we believe is that the market is really a reflection of people’s emotions. So, individual investors who are using the stock market to try to attain double-digit returns have to have an approach to investing that controls their emotions.

So, we’ve been following the approach that my dad discovered during the ‘73-’74 recession. We sell when the market dips below its 39-week average. We’re not big into the idea of switching often; we want to catch just the major trends.

We’re very technically oriented to the market and the reason is we don’t let our emotions get involved. We try to stay away from what our stomachs are telling us.

Q: Do you think that we’re entering a bear market, where there is a decline of 20% or more in the Standard & Poor 500?

A: The potential is very high, since the trend of the market has changed, that we’re entering a bear market. It may be a 10% correction in a bull market, but the statistics lead me to believe that a bearish mode is advancing.

When you take a look at the historical averages, the domestic stock market has been outperforming its historical norm for the past 15 years. And when you go through a period of “overperformance,” you go through a period of “underperformance” to bring yourself back down to the historical averages. The S&P; 500, historically, compounds (grows) each year at an average of 10% to 11%. For the past 15 years, it’s been compounding 15%.

The focus of the next issue of the newsletter, which will come out on Friday, is to prepare ourselves for investing in a bear market.

This market could just correct. The market has proved a lot of people wrong. But I’m preparing people for a bear market. If the market does turn up, we’ll buy back in again in the next four to six weeks.

Q: How do you invest during a bear market?

A: I think that there are some excellent opportunities. A big question is if we go into a bear market whether it will be a worldwide bear market or just the United States. Japan has gone through a bear market. They’ve had a 50% decline. Now it has moved up about 25%, so perhaps the bear market is behind them. So, one of the markets that’s appealing to us is Japan.

Also, the precious metals area is a good one during bear markets. That wasn’t evident in ‘87; gold actually declined then. One of the reasons why was there was a liquidity squeeze. A lot of people were on margins (in which they had borrowed money from the brokerage to invest. It must be repaid on demand).

Q: What do you recommend investors do with their money when they pull out of the stock market?

A: Move into money market funds (mutual funds whose investments are high-yield money market instruments, such as federal securities, CDs and IOUs from major corporations). We’ve been fully invested (in stocks) 70% of the time during the past 17 years and 30% in the money market.

Q: Is the downturn in the market a sign of fundamental economic health of the country?

A: No. As the October, 1987, market showed, we don’t need to be in a recession to have a bear market. The S&P; 500 was up last year and the year before.

Q: How are people reacting to your recommendation?

A: We had 22,000 phone calls on the telephone hot line. That’s a record for our entire history. I think most people followed our recommendation.

Q: You say you have 35,000 subscribers. Wasn’t the number closer to 44,000 a couple of years ago?

A: Yes. The market has changed. A lot of people believe that you can buy and hold.

Q: And they don’t think they need you?

A: Yes. They’ll be back.