Zeev's Turnips Patch-No Politics (ZEEV)

[Ace Hanlon]

Hussman market comments:


As of last week, the Market Climate remained on a Warning condition for stocks and a modestly constructive condition for bonds. The situation for the
stock market is precarious, because stocks are now overbought in an unfavorable Market Climate. Given that our approach leans strongly toward buying
highly ranked candidates on short-term weakness and selling lower ranked holdings on short term strength, I view this as a good and potentially
temporary opportunity to liquidate holdings that are not highly desirable as long-term investments.

Probably the most interesting indicator this week is the proportion of bullish investment advisors. The Investors Intelligence bullish percentage has
declined to just 28.4%, for the first time since 1994. As a contrary indicator, such a low level of bullishness seems like a favorable development.

But how favorable? We looked at the data since the 1960's. While low levels of bullishness are generally associated with somewhat better returns than
high levels of bullishness, they never reverse the implications of a negative Market Climate.

Specifically, when both valuations and trend uniformity have been unfavorable (as they are now), a bullish percentage below 30% has been associated with
an annualized loss of -8.9%, compared with an annualized loss of -13.7% when bullishness has exceeded 30%. The worst case in this Climate occurs
when bullishness is above 50%. In this case, the S&P 500 has declined at an average annualized rate of -22.4%.

Similar patterns hold for other Market Climates. For example, when stocks are in a favorable Market Climate, even extremely high levels of bullishnesss
are still associated with reasonably positive returns, on average.

In short, the plunge in advisory bullishness is interesting, but it doesn't change the implications of a negative Market Climate. At present, the overbought
condition of stocks more than offsets the otherwise favorable implications of this indicator. We remain defensive and fully hedged. While this stance is
always subject to changes in the Market Climate, we have no favorable inclination toward market risk at present.

In bonds, we're still inclined to add lightly to our positions in 6-8 year Treasury maturities on declines. This is primarily on the basis of risk spreads,
which suggest continuing defaults and financial problems which may prompt further demand for Treasuries. I do not think that the bond market offers
particularly good investment merit here, but there is sufficient speculative merit, combined with enough steepness in the yield curve, to favor that 6-8 year
maturity range while corporate risk premiums remain under pressure.