The Big Picture for the Week of April 17, 2005

I had a very good multi layered question come in that I would like to address here.

I read your blog every day (as I mentioned) and have learned a lot from it. I also read Hussman and his strategic growth is where I have most of my stock money at the moment. He believes the market's valuation is close to where it was in 2000 and '87. Do you read his weekly market updates? I came into the market for the first time with a good chunk of change back in January, putting it into mostly broadly diversified index and mutual funds due to a financial advisor's advice and then read Hussman's updates and started believing him and pulled most of it out. His charts about valuation to me are convincing. I put a good bit of it in his fund for the moment and after the last few days haven't regretted it, though I know that could change quickly. Still I'm curious what you think of his reasoning. Have you read him? Your mention of inverse SPX funds if things look bad on Monday was exactly what I was thinking.

First a few things about Mr. Hussman and then I'll offer my thoughts on his thoughts. I have written about him a couple of times before. If you are not familiar with his site you should be. I read it occasionally but I admit I should read it more. He knows more than I do and I believe he is better able to process the totality of what moves markets better than I can. That does not give him, or anyone for that matter, a monopoly on being right. I have had an accurate call or two in my time too:-)

The reader notes Hussman says market valuations are like 1987 and 2000. Huh? The SPX is at about 20 times earnings today. I'm sure that he has data to support his point but there is data that says he is wrong too. More importantly to me is that we have not taken back the highs set in 2000 in the SPX or Nasdaq ( but we have in the small cap market).

Coming off the bottom in March 2003 to year end 2004 is only about 21 months of bull market, short by most historical standards, and (to repeat) those 21 months did not result in new highs. To me that does not add up to an implosion. I do not think it will take three years or more for the SPX to go back to 1220. I would not be shocked if the market dropped to about 1100 (I think I see two different trend lines that both lead to about that level).

Rising rates could get in the way of what I am saying, possibly? At the beginning of tightening cycle I wrote on the blog and commented on CNBC Asia that I thought the fed would stop in a range between 2.75% and 3.50%. Shortly there after I narrowed my range to 3.00%-3.25%. Two months ago I figured that I'd be wrong by a lot but now it looks like it won't be much above that 3.25%. Point being that if the Fed really is almost done they become less of a threat to the market.

My 2005 forecast for equities was that I thought we'd be lucky to see mid-single digit growth so I was not real optimistic but it has been uglier that I thought it would be. I have to think we will take back a good chunk of the 50 or 60 points we have lost, but while it may take a few months. I would be thrilled to see some sort of violent, fundamental-less, snap back rally that has a small chance of happening.

Keep in mind the action I am taking is more important than what I think might happen. I gave specific detail of my game plan for the coming week in a post on Friday. To me this is not a time to try to outsmart market history. I expect to start taking defensive action on Monday and stay defensive for the time being. I'll update this blog with any changes.