As a third year of the great millennial equity bear market draws to a close amid a cheerless holiday season, it's time to reflect on investment strategies that worked and failed over the past 12 months.

At SuperModels, we enjoyed a bull market in skepticism as the best results came from our most cynical, go-against-the-crowd efforts. Whenever we went with the flow, we drowned.

S&P Follies

Capital contrariness here begins with our jaundiced view of the Standard & Poor's indices. These represent investment industry standards and consensus -- for what reasons, other than good marketing and accidental success during the '90s bubble, we're not sure. Once again in 2002, as in 2001 and 2000, the S&P team led by eccentric economist David Blitzer managed to expel winners and add losers to its mid-cap and small-cap indexes with stunning regularity.

S&P kicked 25 companies out of its SmallCap 600 Index in 2002 through Dec. 16, for reasons other than merger or promotion to another index.

Eighteen of those subsequently went up, while just seven went down.

The average return of all expellees was 43.6%, led by a 302% advance in

Factory 2-U Stores

( FTUS) from its closing price on its last day in the index (Oct. 11) to Dec. 16. Then there was a 255% advance in

Aspen Technology

(AZPN) - Get Report

from Oct. 11; a 212% return in

Stratos Lightwave

( STLW) from June 12; a 94% move in

Brightpoint

( CELL) from Feb. 7 to date; and a 98% move in

Trenwick Group

( TWK) since Nov. 14.

These results include four stocks that lost virtually all their value after getting the boot:

Mutual Risk Management

( MLRMF),

Organogenesis

(ORG) - Get Report

,

Mississippi Chemical

(GRO)

and

Advanced Tissue Sciences

( ATISQ). But index makers shouldn't feel too smug about pushing these out, as they had all already fallen more than 80% in the 24 months prior to expulsion.

S&P added 42 stocks to its small-cap index to replace expellees, merger victims or stocks that moved up to its mid-cap index.

Of those, 27 subsequently went down in price while 15 went up.

The average move among the additions was negative 7%, which was better than the index overall, which lost 13% for the year through Dec. 16.

The worst additions were

Children's Place Retail Stores

(PLCE) - Get Report

, down 69%, and

eFunds

( EFDS), down 50%. The best were

Biosite

( BSTE), up 73%, and

New Century Financial

(NCEN)

, up 36%.

At the index that tracks medium-sized companies, the S&P MidCap 400, the Blitzer committee was much less active, kicking out or demoting only seven stocks and adding 26. Of the expellees, four went down and three went up for an average return of plus 26%. Among the additions, 13 went down and 13 went up, for a net change of negative 6%.

The best-performing expellee was

MIPS Technologies

( MIPS) up 136% since getting kicked out Sept. 30. The top-performing addition was

PetsMart

(PETM)

, up 34%. The worst-performing adds were

Copart

(CPRT) - Get Report

, down 49% since Jan. 31, and

Intersil

(ISIL)

, off 47% since May 14.

At the

S&P 500

, the Blitzers lost their ruinous 2000 and 2001 appetite for wheeling and dealing, kicking out just four stocks for reasons other than merger -- the lowest number in years. (Four more foreign-company stocks were kicked out when S&P decided to make the 500 an all-U.S. index.)

The humbled four went on to lose another 49% in value, led by an 85% decline in

WorldCom

and a 78% decline in

US Airways

, both now bankrupt. The committee did investors no big favors, though, as both stocks were down more than 85% for the 12 months prior to their expulsion.

The 21 stocks added during the year lost 7% of their value during a time when the index lost 14% overall. The biggest disappointments were

Rational Software

( RATL), down 56% from its Jan. 31 addition;

Plum Creek Timber

(PCL)

, down 22% from Jan. 16; and

R.J. Reynolds Tobacco

( RJR), down 26% from Sept. 3. The best adds were

Apollo Group

(APOL)

, up 11.5% from May 14, and

eBay

(EBAY) - Get Report

, up 16% from July 19.

10 S&P Plays

Even after its big run from the Oct. 10 lows, the S&P 500 index still has 22 stocks priced at less than $5. If you think that the market has the potential to rock again for a week or more following its early-December correction, consider going into the end of the year with the same successful posture that I recommended for speculators in mid-October: Buy an evenly weighted basket of 10 of the lowest-priced, cheapest, most heavily shorted S&P 500 stocks that had the worst performance year to date.

The 14 recommended on Oct. 17 went up an average of 85% over the subsequent two months, led by 100%-plus gains in

Solectron

( SLR),

Sprint PCS

(PCS)

,

AES Corp.

(AES) - Get Report

and

Lucent Technologies

( LU).

If you want fewer, focus on the ones with dividends, as there seems to be a move afoot to cover shorts of dividend-paying stocks in anticipation of potential new tax treatment in the next session of Congress.

Here are the 10 this week. Please note that this is a speculation based on a big investors' habit of quickly "equitizing" their cash by buying exchange-traded funds representing the S&P 500 -- not a determination that these 10 merit a long-term hold.

More Moves Against the Crowd

Other examples of SuperModels' interest in fading the market in 2002:

In May,

I suggested that expectations were too lofty for high-P/E stocks like

Vivendi Universal

(V) - Get Report

,

AOL Time Warner

(AOL)

,

QLogic

(QLGC)

and

Circuit City

(CC) - Get Report

. They went on to subsequently drop 50% to 70% before rebounding a bit in the fall.

Later that month, SuperModels

warned against the future prospects of companies such as

Argosy Gaming

( AGY),

Crown Cork and Seal

(CCK) - Get Report

and

Raytheon

(RTN) - Get Report

that carried high levels of goodwill on their books after overpaying for acquisitions. These all went on to sink by 50% to 65% before a fall rebound.

As the market was faltering in its late-summer rebound in July,

SuperModels recommended purchasing stocks that would interest "vulture investors" who would take advantage of low equity values and take strong, cheap companies private. The four stocks highlighted --

Allied Waste Industries

( AW),

Old Dominion Freight Line

(ODFL) - Get Report

,

Aaron Rents

( RNT) and

Quanta Services

(PWR) - Get Report

-- rose an average of 54% from then through this week.

In early October, as the market was plunging,

we offered a list of five stocks priced under $5 that could rebound in the event of a turnaround. They bounced 22% on average, led by an 85% advance in supercomputer maker

Cray Inc.

(CRAY) - Get Report

and a 47% move in

Monterey Pasta

( PSTA).

In November, as the fall rally appeared to lose steam,

we suggested getting on board with insiders at

Amkor Technology

(AMKR) - Get Report

and 10 other stocks -- and they went on to advance 42% as a group, led by a doubling in Amkor.

As for individual stocks, SuperModels waved the red flag of overvaluation or overly aggressive accounting on

Toys R Us

( TOY),

Emulex

(ELX)

and

Electronic Data Systems

(EDS)

. All went on to collapse by 50% or more before recovering some (but not all) ground.

The moral of the story for each: The seeds of decline for all were hidden in plain sight in the companies' electronic filings with the

Securities and Exchange Commission

. There was no reason for shareholders to have been blind-sided.

To be sure, SuperModels suffered its share of mistakes:

On Jan. 9, 2002, we tried to get along with an early-year rally by forecasting that the year could turn out like 1991 -- a powerful up year for stocks. I suggested that the best way to take advantage was to buy the

iShares S&P 400 Midcap Value

(IJJ) - Get Report

. This instrument was down 9% in 2002 through Dec. 16, vs. the negative 14% performance of the S&P 500 and 28% decline of the Nasdaq.

Two of the worst ideas came in September.

We suggested an already-declining

Cablevision Systems

(CVC)

was a sell on Sept. 26, due to its massive debt load. It did go down 30% from there, but then it tripled from its early October low around $6 after the company discovered its survival instinct and decided to liquefy its balance sheet by selling a key asset.

On Sept. 11,

I revisited a longstanding call to own defense stocks -- only this time we got blasted as top names

Northrop Grumman

(NOC) - Get Report

,

Lockheed Martin

(LMT) - Get Report

and Raytheon were subsequently heavily sold off in a classic profit-taking/sector-rotation move.

So what's on the horizon? More turn and burn, as volatility makes a repeat visit in 2003, offering many more opportunities to take advantage of perceptions at variance with consensus that stems, as hedge-fund legend Michael Steinhardt told me in

an interview last fall, from "an intellectually advantaged disparate view."

SuperModels will be on hiatus next week, but we'll have a 2003 forecast ready for you on Jan. 1.

Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at supermodels@jonmark.com. At the time of publication, his fund owned Level 3 Communications, but positions can change at any time.