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To: ild who wrote (169506)	6/3/2002 10:34:26 AM
From: ild	Read Replies (1) \| Respond to of 436258

Sunday June 2, 2002 : Hotline Update The Market Climate remains on a Warning condition. On a weekly closing basis, the S&P 500 Index is up just over 10% from its September low. Analysts can call that a bull market if they wish. In our view, bull and bear markets don't exist in observable reality - only in hindsight. What matters is what can be observed. At present, valuations remain extremely unfavorable, so there is no investment basis for taking market risk. Trend uniformity also remains unfavorable, so there is no speculative basis for taking market risk. And so, we remain fully hedged. We can't rule out the possibility that stocks are indeed in a bull market. But even if we believed they were, we would be fully hedged, because that belief would be pure opinion. The same goes for our investments in various industry groups. Even if we thought financial stocks might rally, they currently fail to satisfy our criteria of valuation and market action. Until a few weeks ago, we held a number of gold stocks, but we sold them on strength because they became overextended and certain trend supports were lost (see "Going for the Gold" on the Research & Insight page to see some of these considerations). I would expect to reestablish gold positions if the Purchasing Managers Index was to fall below 50 and long-term rates were to trend lower. But for now, we've taken good profits and are comfortable having done so, regardless of whether gold moves higher or pulls back. In each case, our positions are driven by specific, observable criteria - not anybody's opinion, including my own. I really believe that the key to success in anything is daily action. Find a set of actions that you believe will produce results if you follow them consistently. Then follow them consistently. One of our daily actions is to position ourselves in line with the prevailing Market Climate, rather than investing on hope. Another is to take daily opportunities as they arrive - buying highly ranked stocks on short term weakness, and replacing lower ranked holdings on short term strength. By focusing on the present realities, we've already attended to the future. Since the present is the only point at which we can exercise action, a constant focus on the present typically results in repeated and effective activity toward our goals. In contrast, many investors have focused on denying reality and hoping, hoping, hoping for a recovery. That hope has locked them out of all activity. All they can do is hold on, being happy when stocks rally, and being disappointed when they decline. But never taking action, because they've relegated action to the future, when they hope for some vague opportunity to break even. In market action, corporate bonds have been behaving somewhat better, and it will be one positive if that trend can continue. But most of the economic attention this week will be focused on the Purchasing Managers Index and the unemployment rate. The Chicago PMI was strong, and the national figure comes out on Monday. That may give investors some brief encouragement in the face of a slightly oversold market. In contrast, I would expect that the unemployment rate will remain quite high, reflecting the dismal rate of hiring evidenced by the help-wanted index. As I've noted frequently, the help-wanted index and capacity utilization are the key figures that might help to confirm expectations of an economic rebound. Currently, both remain near their recession lows. In other indicators, Barron's notes that the slight increase in the CBOE volatility index was cited by traders as a "positive sign that a short-term bounce is near." Unfortunately, that's not how the VIX tends to work. The VIX is still at a very low 22.8%. Typically, market declines accelerate once the VIX rises measurably off of its low. It's only when the VIX spikes to a very very high level that investors can form beliefs about the market being oversold. And even then, the extremes are typically identifiable only in hindsight. In short, the recent upmove in the VIX is a negative here. In any event, the present Market Climate holds us to a defensive position for now. hussman.com