Close Enough for Comfort

I wake up very early each morning, and as I search for clues to support our investment theme, I try not to get too caught up in each morning's headlines, because that will often cause me to get trapped into trying to guesstimate the most likely pattern of the market for just the coming days or weeks - not the coming months and years.  So this morning, I want to stress (and reiterate) that we are top-down long-term investors, and the crux of our investment philosophy is based on the top-down approach that is centered on our Asset Allocation Model.  So, let's start at the top.

We are in a bull market.  That flamboyant statement will send some scurrying to send us scathing rebuttals, but here it is.

Click on image to view larger chart.

Of course, the stock market has suffered a severe correction in these last 3 months, just as it did last year, but as you can see in the chart above, the stock market is still solidly on a trend of higher highs and higher lows.  At the end of last year, as we always do, we examined the evidence and came up with our guesstimate of where the stock market would be at the end of this year (2011).  This is a pure and simple guess, but it's an educated guess based on the evidence provided by our guiding light - the combination of Investor Psychology, Monetary Liquidity and Stock Market Valuation.

And in December of last year, based on our reading of these indicators, we projected a level of 1500 on the S&P 500 for the end of the upcoming year (this year).  Now while this year-end projection is proving to be far too optimistic for this year end, the target is still intact on a different, more elongated timeline.  Just take a look at where our Asset Allocation Model stands today below.  Since December of last year, we have seen Psychology improve from P4 to P2 (while at one point deteriorating to its worst level of P6) and Monetary improve from M2 to M1, with Valuation remaining at its most bullish level of Extremely Undervalued over the time period.

I can almost feel the vibes of those that dispute this "continuing bull market" theme.  The stock market is never "normal."  It's behavior has a long history of scaring people out of stocks right at the bottom, and seducing them to buy stocks right at the top.  But don't forget the quote by the legendary investor Warren Buffet: "Be fearful when others are greedy, and greedy when others are fearful." 

How do you tell the difference?  As we have it today, when our Psychology Composite is at P2, others are very fearful.  So my conclusion is always that when this occurs, you know the great buying opportunity is close enough for comfort.

Click here to read today's full Market Comment.

Don Hays

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