Bullish For The Next Few Years?

I commented last night about a reader named Mike who shared his cautious stance on the blog and that he has taken some defensive action in his 401k and may short the market. I wrote that I thought Mike was working more from gut feeling than anything else. Mike responded here.

He says it is not a gut feeling on his part. He notes the yield curve is almost inverted, energy is a problem, there is a housing issue, military conflict and so on. If I read his comment correctly he has zero equity exposure.

I do not disagree that any of these things create visibility for problems. The curve is NOT inverted. It might invert, and if it does for more than a day or two it will not be different this time. But almost does not count. An inverted curve means lending money becomes a money loser. Not being able to access capital is what hurts the economy.

I think Mike is applying rational thought to an emotional market. It is possible that Mike's comment has erected a wall of worry that the market might climb for a few months. I do not know, but if the next three months are straight up for no logical reason at all, which has happened repeatedly throughout out market history, a zero equity exposed account will lag badly.

The bottom line is that Mike has taken a very extreme position (again, if I read him correctly) and has not built in any counter strategy in case he is wrong.

One other thing from this, Mike asks if I am bullish about the next few years. I have to admit I don't try to look out that far in terms of labeling myself as bullish or bearish. So many people get one year wrong that I think trying to get the next decade right is futile. It easier for me to see that maybe oil demand will increase more rapidly over the next few years than it has over the last few, as an example.

At the beginning of 2005 I wrote that I thought we would be lucky to see mid single digit growth for the year. Now that we have better visibility for 2006 I see some real problems looming on the horizon. At this point the SPX is close to its 200 DMA, close but not under. The curve is almost, but not yet, inverted. I think long term money can risk down a little. If the curve inverts or if the S+P goes below its 200 DMA I will take some action. No matter what, defensive action will never mean selling every stock. I view that as very aggressive, which is 180 degrees from what I try to do.