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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: J.T. who wrote (13791)	7/25/2002 9:17:19 AM
From: High-Tech East	Respond to of 19219

... from John Hussman this morning ... Thursday Morning July 25, 2002 : Special Hotline Update It's always nice to note on Tuesday that I wouldn't be surprised by a 500 point rally, and then to have the market rally about 500 points on Wednesday... That said, the Market Climate remains on a Warning condition for now. As I've noted frequently in recent updates, there is a good chance that the Market Climate will shift to a favorable stance in the next week or two. In order for that to occur this week, we'll need much better market breadth than we saw on Wednesday. It was a bit disappointing that advancing issues could only muster a 3-to-2 lead over declining issues, but trading volume was great. Fortunately, when the Market Climate is shifting to a more constructive stance, there is a tendency for explosive moves in large-cap stocks to be followed the next day by much broader follow-through. We'll take our evidence as it arrives. Now, I realize that it's tempting to pre-empt a positive shift in the Market Climate by just lifting our hedges here and now. But in the historical data, I've seen enough shifts that seemed probable and failed to know that waiting for the evidence is better, on average. And while my opinion is that a shift is likely within two weeks, I assure you that it is the road to ruin to follow anybody's opinion (including mine) in preference to a disciplined approach. So we'll await further confirmation of a breadth reversal here. In the meantime, we're already well prepared for the possibility of cutting our hedges by about 40% in the weeks ahead. (Note to my former finance students: what is the appropriate method of hedging a contingent liability?) In my opinion, a favorable shift in the Market Climate would suggest a bear market rally rather than a new bull market, but there's nothing wrong with that - a good bear market rally could plausibly take stocks 15-20% higher in a span of weeks. But in any event, I continue to believe that the full scope of defaults and economic weakness has not been seen, and that a durable bear market bottom will probably only occur when investors lose the ability to imagine that the economy can improve. It will probably take months if not quarters for investors to abandon expectations that "the economic rebound is just around the corner." At present, stocks are priced to deliver a long-term total return to investors of about 8%, assuming that the price/peak earnings ratio on the S&P 500 remains at the current level of 16 indefinitely (the 1929, 1972 and 1987 peaks occurred at 20 times peak earnings, the historical average is 14, the historical median is 11, and the typical bear market low is less than 9). Investors who see 8% as an attractive and sustainable long-term return are absolutely free to consider stocks "fairly valued" here. When you hear analysts saying that stocks are 20% undervalued on the basis of the Fed model or other measures, you have to understand that they are implicitly assuming that stocks should be priced to deliver long-term returns of even less than 8% annually. It is absolutely false to believe that this sort of "undervaluation" has any implication of satisfactory long-term returns in practice. Very simply, in order for stocks to be priced to deliver higher returns, they would have to sell at substantially lower valuations. Over the short term, there's a good chance that stocks will have enough speculative merit to make valuations temporarily irrelevant. But the hard fact of investing is that long-term returns are tightly linked to valuation levels, and higher valuations imply substantially less attractive long-term returns. We're still not out of the woods on that front. http://hsgfx:reciprocal@www.hussman.com/hussman/members/updates/latest.htm