Sunday, 5 December 2004

Play conservatively, hedge your bets

In a recent commentary at CBS MarketWatch, Mark Hulbert points out that among the 11 funds most recommended by market-beating newsletters are three bond funds. An additional three funds invest in international stocks. The remaining five are US equity funds, none of which were "bear" fund that gains whenever the market declines.

His interpretation of these picks is that the best performers think that aggressive bets on the market moving either up or down should be avoided, and that "now is the time to play it conservatively and hedge your bets by diversifying widely."

In another commentary, Hulbert dismisses the prospect of Richard Russell of Dow Theory Letters issuing a buy recommendation despite the market's recent strong rally. As Hulbert puts it:

"The essence of Dow Theory concerns itself with VALUES," he wrote just before Thanksgiving. And even if the DJIA were to confirm the Dow Transports by rising above the 10,738 level, the stock market according to Russell would by no stretch of the imagination represent good fundamental value. After all, price/earnings ratios remain sky high and dividend yields are incredibly low.

On this interpretation of Russell's writings, a Dow Theory buy signal will not get issued for quite some time -- not until P/E ratios fall towards the low end of their historical range and dividend yields rise to the high end of theirs. Absent a monumental crash, that is probably years away.

This, as far as I can interpret, is basically saying that we are not ready for a secular bull market. Which seems fair enough. What I think most people want to know, though, is whether the cyclical bull market that began in 2003 is over.

Barry Ritholtz tries to answer that question using -- in his words -- "a rather esoteric technical pattern" (see his comments to my earlier post) in "Three Peaks and the Domed House redux".

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