Zeev's Turnips Patch-No Politics (ZEEV)

[Ace Hanlon]

John Hussman -- who has the best forecasting record of anybody I am aware of (at least as regards the major trend) -- still bullish. Prepared to aggressively buy the dips.



The Market Climate for stocks remains characterized by unfavorable valuations but favorable trend uniformity, holding us to a constructive position. Last
weeks' market action was particularly good in terms of uniformity - the NYSE recorded 1097 new highs and just 2 new lows. The only other instance in which
the NYSE has recorded over 1000 new highs was the week of October 15, 1982. While I certainly don't view the market as similar to 1982 in any respect, it's
clear historically that a large number of new highs is not a negative unless it is also accompanied by a large number of new lows - the bearish feature in that
case being widespread internal divergence - we don't see that here.

Still, stocks remain overvalued, and neither strong market action nor the likelihood of good second-half economic growth will change that condition. Assuming
that current, rich valuations will be sustained into the indefinite future (S&P 500 price/peak earnings currently 18.4, dividend yield 1.67%), stocks are priced to
deliver long-term total returns of less than 8% annually. If the assumption of sustained overvaluation is removed and valuations move toward historical norms
even a decade or two from now, the S&P 500 will deliver total returns in the neighborhood of 2-5% annually overall. Clearly, our willingness to take market
risk here is based strictly on evidence of robust speculative merit, not long-term investment merit.

This does not mean that current market conditions are fragile or unreliable. To the contrary, historical market returns in the current Market Climate have been
quite good on average, with somewhat below-average levels of volatility, regardless of valuation levels. We always allow for the possibility that the Market
Climate will shift, which is why we never make forecasts even a few weeks into the future, but for now, we have no evidence by which to hold a substantially
defensive investment position.

Last week, the Dow Industrials finally generated a Dow Theory confirmation by advancing past their November peak. While we don't actually use Dow
Theory, we do respect it enough to keep an eye on divergences and confirmations under the theory. Against that favorable news, stocks are clearly overbought,
and the percentage of bearish investment advisors has dropped to just 20% - lower than can be explained simply by appealing to the recent market advance.
We wouldn't speculate on the possibility of a market pullback here, but we certainly wouldn't rule one out. In the current Market Climate, such pullbacks have
historically represented reasonably good buying opportunities. Overall, we're constructively positioned, and inclined to use short-term weakness as an
opportunity to purchase desirable investments.