Now for the good news: whoever finds this “missing ingredient” will make a lot of money — and just by doing two simple things.

How do you find this missing ingredient? One way to do it:identify the right trend.

Now the world is full of trends: some weak, some strong, some good, some bad. For example, Halloween’s been in a trend for a while — a rather strange trend. For centuries, “All Hallows Eve” was just the night before a religious feast day: All Saints. People thought about the living and the dead, the sinners and the saints.

Then, over time, it kind of morphed into cute costumes for little kids until eventually the whole “trick or treat” thing started. Mostly, you got a mix of princesses, pirates and the occasional skeleton. Fair enough. Then adults joined into the dress-up thing. No comment.

But what’s up with all the blood and gore now? How does that have anything to do with Halloween? Where did the whole horror thing come from?

However that trend got started, all we know is that seemingly normal, rational people now decorate their homes with ugly, revolting displays. (Doesn’t anyone else think this kind of stuff ruins the neighborhood?)

So trends can be pretty powerful, and when they are, lots of people jump on board, especially for a long-term trend like the change from cuteness and innocence to glitz and gore. At first it was a kind of a fringe thing. But then it caught on and now people are convinced it’s somehow normal. They think it’s fun to run around like murderers, corpses, evil spirits and the like. Strange but true.

Investments run in trends too — all kinds of trends. Some of them are just brief passing trends; some are pretty powerful important trends. We’ll focus on a few of the important ones this month and next month:

• The Three Investment Trends You Must Know Today — Before You Invest Your Next Penny
• How the “Phase” of a Trend Helps You Know When to Buy or Sell
• How Some People Will Be Caught in the Frightening Reversal of Today’s Biggest Trend
• Who Will Make a Fortune — Instead of Losing Their Shirts — When the Trend Reverses

We figure it’s a good way to ease up on all the negative news out there and get focused on something we can actually do something about.

After all, big changes are here, what with the recent national and local elections, the Fed ready to initiate another round of “quantitative easing” (AKA printing money), a brewing international currency war, and rising agricultural commodity prices ready to send food prices shooting up early next year.

But why worry? It’s not like there’s that much we can do about all that. So instead, let’s put our precious time and brain power to good use. We’re going to cover something you can use to protect yourself — and maybe make a few bucks — whatever comes down the pike in the coming months and years. And that’s how we’ll find the “missing ingredient” that will show us the way out of the mess we’re in right now.

• The Primary Trend
• The Secondary Trend
• The Daily Trend

Ah, now it sounds a little more “official” doesn’t it? Okay, let’s stick with these names. We’ll use the stock market as an example of how these trends work. (Just remember you can look at any item in terms of its long, intermediate and short-term trend.)

Now, since these trends apply to both bull markets and bear markets, we’ll need to pick one for our example. Let’s go with the bull.

The Primary Trend

When you’re in a primary bull market trend in stocks, you’re more confident about investing your money. And once you do invest, you’re more confident about sticking with your investment, probably for a long period of time — maybe years. You’re looking to ride your stocks up, the same way some crazy people ride a bull in a rodeo.

And just like the rodeo rider, the biggest challenge when riding a bull is to stay on its back. The bull will always do it’s best to shake you off. How does the bull do that? He scares the daylights out of you.

You’ve heard people say markets are driven by greed and fear? Well, this is the fear part. When a primary bull market “corrects,” that means that prices drop. And — judging by our own experience — somehow the bull knows just how much he needs to drop prices until fear takes over so he can shake off the maximum number of riders.

The reason the bull wants to do that is to lighten his load so he can start prices rising again. In the end, the only ones left riding the bull after a real market correction are the ones convinced they’re in a primary trend. That gives them the courage to not only hang on, but to hang on all the way up — or at least most of the way up. That’s why knowing that you’re in a primary trend is so important.

The Secondary Trend

That correction we mentioned — the one where the bull starts shaking – is an example of a secondary trend. The secondary trend doesn’t last as long as the primary trend. Typically it’s a matter of weeks or months. In rare cases, it can go over a year.

When you know you’re in a primary bull market trend, and the secondary trend — the correction — takes over for a while, you’ve got a choice. Either you just hang on while prices drop, or — if you really know what the heck you’re doing — you can “short” the market on the way down. (In our experience, shorting is a specialty and you’ve really got to be skilled to make money this way. Most people are better off just hanging on.)

So what’s the third trend?

The Daily Trend

The daily trend isn’t really much of a trend. It consists of price movements during any given day. The daily action of prices can only be considered a “trend” if you’re a highly skilled trader.

The price of anything actively traded on the world’s exchanges — funds, individual securities, options, futures, etc. – pretty much moves up and/or down on any given day. Rarely does an item start and finish a trading day at the same price. Speculators, rather than investors, focus on this market. They watch their screens and make bets on which way the price of a given stock is going to go. They make and lose money all day. And they hope that at the end of a day’s trading, they’ll be in the black.

Only the most highly skilled, most experienced traders ever make real money here. The rest usually tread water or just lose their shirts.

Investors don’t really concern themselves with this trend. In fact, you really can’t be considered an investor if you do. You’re a trader, or speculator.

In the first phase of primary bull market, sophisticated investors begin to build their positions. In the case of stocks, that means buying great stocks at great values. These are the stocks you’ll probably hold for a long time, in spite of those secondary trends where the bull tries to shake you off.

In the second phase, more investors catch on and start buying. This is the longest phase of a primary trend. It can last for years.

The best recent example we have is the primary bull market trend in gold. Sophisticated investors took their initial positions from 2000 to 2003 while gold was priced under $400 per ounce. Starting sometime around 2004, the second phase began. The gold bull market is still in its second phase.

In the third phase, the public at large gets involved. That’s when retail investors pour into the item. It’s here that you get the biggest rise in prices.

A good recent example of the third phase of bull market is the late 90’s when investors poured into technology stocks (and the stock market in general). We remember talking to a tech geek who lectured us on various tech stocks he was investing in. He was going to buy a house and figured he’d get his down payment this way. He certainly knew technology. As for investing, that’s another story. He never did get his down payment.

See, the thing about the third phase is that “mania” sets in. People can’t buy fast enough. So you get some kind of buying frenzy that lasts until — well, the market collapses.

Now the collapse doesn’t have to happen in a few weeks or months (like in 2008). In 2000, as people were stuffing more and more stocks into their portfolios, the stock market began a sickening slide that lasted for three years, until it bottomed in October 2002.

Getting back to our three phases, if you can last through all three phases, you’ve made a ton of money. But, naturally, the question comes up: when do you sell?

First of all, trying to time these things and wait until the last minute probably won’t work. So chances are, getting out a bit early makes more sense. After all, once the primary trend reverses — like it did in 2000 — you eventually wind up with people crowding the exits. You want to be long gone by then.

Now, we won’t say it’s easy figuring out trends — or even what phase you’re in, for that matter. But it’s not a mystery or rocket science or anything like that. You see, it all comes down to “values.”

Let’s say you were one of the smart ones who took a position in stocks around 1980 — when the last great bull market in stocks began. There you were, having gone through years of a long, long bear market that began in 1966, with an economy stuck in “stagflation” (remember that?). No one in their right minds wanted to invest in the stock market. And that’s your first signal: everyone’s out of stocks, not interested in stocks, even hates the word “stocks.” So now you’re going to think that maybe it’s time to get back in.

Of course, if you mention this to your spouse, or your best friend, or your buddies at the office, they’ll think your nuts. But that’s OK, because you know about trends and phases, and you’ll know that, in the first phase of a primary bull market, those investors who take positions need a good shot of courage in the face of the prevailing fear that surrounds them.

It’s like if you established a position in that first phase of the primary bull market in gold: you were better off just keeping it to yourself. Investing in stocks in 1980 was bad enough. Anyone who invested in gold between 2000 and 2003 got looks that — if they didn’t kill — were practically telling you that you should check into the psych ward of the nearest hospital. At best, people just rolled their eyes. (In fact, it’s not that much better now, which tells us the gold bull market has a long way to go.)

But you need one thing more. You need to know that the stocks, or gold, or whatever you’re considering buying is selling at great — and we mean GREAT — values. In the case of stocks in 1980, that most probably meant a big solid blue chip company with a P/E of 10 or less, and a juicy dividend payout of 6% or more — plus a great business that dominates its market, along with a ton of free cash flow.

So those are the basics of trends and their phases. And with what we know now we can finally identify what’s been missing since the markets imploded in 2008: great values.

Even after what seemed like a total wipeout in the stock market in 2008 — a wipeout that didn’t finally bottom until March of 2009 — we never quite got to the point where we could say great companies were selling at great values. Notice we’re not saying you couldn’t find some great businesses selling at attractive values. You could. And if you did, you could have made some money.

But great values in the overall market? Hardly. And that’s what we’ll need to see if we want a hint that the economy is ready to turn around. A few companies selling at attractive prices won’t do it. You can make money for yourself if you know what you’re doing. But that’s not going to tell us the economy as a whole is getting better.

So, to sum up, when great companies sell for P/E ratios around 8-10 and shell out dividends of 6% or more, we’ll be looking at the kinds of values you found in 1980 and all previous bear market bottoms. And at that point, we’ll start thinking that maybe the first phase of a new bull market in stocks — and a sustainable economic turnaround — has commenced.

Of course, that will be just a first good indication that we’re really, finally coming out of the woods. We’ll be just about at the point where we can look forward to putting the troubles we’re in now behind us. Don’t expect to see people dancing in the streets. Most people won’t have any idea things are getting better. But, nevertheless, you’ll know it’ll be a great day.

And what will be the two simple things you’ll do then — the two things that will make you a lot of money? You’ll hop right up on the back of that new bull market, take your first positions in those great companies selling at great values and hold on right through those three phases of the new bull market.

Just remember that when you do, most of the world around you will think you’ve lost it. But that’s OK. That’s the best time to load up the wagon — while everyone’s shaking their heads and feeling sorry for you. Let’s hope it doesn’t take too long in coming.

It’s time to finish up. Next time we’ll be talking about:

• How Some People Will Be Caught in the Frightening Reversal of Today’s Biggest Trend
• Who Will Make a Fortune — Instead of Losing Their Shirts — When the Trend Reverses

But the trend we’ll be talking about won’t be stocks. And it won’t be gold either. In fact, we’ll be talking about a trend that’s been going on just about as long as the recently deceased great bull market in stocks that started in 1980 and the current bull market in gold put together.

You’ll see how we may be looking at another massive bubble ready to blow up in the face of some of those same folks who’ve already lost so much value in their stocks and their homes. And we’re hoping we can help assure that you’re not one of them.

We’ll also take a look at “emerging” markets and all the hoopla surrounding Asian economies — including the no-longer-sleeping giant: China. With everyone saying that’s where we should all be investing now, we think it’s worth taking a look at just how true that really is.

For now, we’re just starting to really cool down here in the Northeast, which reminds us that Thanksgiving will be here in just a little over three weeks. The year’s flying by and soon it will be 2011. Incredible!

If all goes as planned, we’ll have our next letter out before we start cooking the big dinner. This year, we’re expecting a larger than usual family gathering which means a bit more time for preparation. But that’s OK. It’s hard to go wrong with family and food.

Speaking of food, we just ate the absolute best carrot cake ever. Got it at a tiny little place across from Van Cortlandt Park in the Bronx. (We were at one of the park’s ubiquitous cross-country track meets.) It’s called “Lloyd’s” and has apparently been there since 1986. Who knew? It’s so good you’ll love it even if you’re not a carrot cake fan. It’s amazing how New York City never runs out of delightful surprises. (And there’s still some left over in the fridge. Mmmm…)

P.S. — And speaking of surprises, don’t be surprised if the mortgage foreclosure mess turns out to be a game breaker when it comes to any real economic recovery. We’ve been digging into the details and you can see what we’ve come up with so far athttp://rickesposito.blogspot.com, or go right to Two Reasons Why Home Foreclosures Are Stalling and my follow up: More on Mortgage Foreclosures.

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

Email: resposito@lighthousewm.com