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    Saturday, April 16, 2005


    More thoughts on the pullback

    I think based on valuation we are in for a rough patch in the overall market. I believe that until PEs reach single digits for the broad market a new secular bull market will not begin. We are in a secular bear market and close to the end of a cyclical bull. I also believe that this cyclical bull was an "echo bubble" of the .com bubble and the following bear markets will be deeper than 01-03 and the cyclical bull markets that will be spread inside the cyclical bull will be less powerful than the one ending now.

    I also believe based on monetary factors, new demand from Asia, under investment and low valuations resource stocks are in a secular bull market and a cyclical bull. The secular bull market in resource stocks will end with outrageous valuations, overinvestment and supply exceeding demand and significant inflation (so significant it will actually show up in the government hedonically adjusted statistics).

    Moving to the current pull back, I heard a fantastic quote today from Andy Kessler author of Wall Street Meat and Running Money in addition to the soon to be released (and freely available on his website) How we got here. This quote sums up my feelings on the current pullback perfectly. He said it's not what you've got going into one of these pullbacks that matters, it's what you come out with. IT'S WHAT YOU COME OUT WITH.

    Interestingly during the great bull market in the Dow Jones Industrial Average from 1980-2000, the DJI dropped a maximum of 37% below it's 200 day moving average. The DJI dropped below it's 200 day moving average every 80 days (on average). It spent 409 trading days 10% or more below its 200DMA and nearly 780 trading days 5% or more below. One of the greatest bull markets in history had plenty of pullbacks.

    Of the stocks I recommended in the last few days, FLX is trading at 3.1 down from 52wk high of 3.94 but its 200DMA is around 2.4. STM is trading at 1.69, down from 52wk high of 2.95 and its 200DMA is around 1.5. IVW is trading at 1.57 down from 52wk high of 2.35 and its 200DMA is around 1.38. I could go on.. but the pattern is clear.

    These stocks are still in the money from an average purchase price over the last 200 days. This is a small pullback, even though it looks big compared with the 52wk highs. It is an excellent buying opportunity, but at some point over the next 5-10 years we will probably see buying opportunities where resource stocks fall as much as 30% below their 200DMAs BUT they will be falling from valuation levels much higher than today's or stated differently, they'll go up a lot from here and fall a lot but not nearly as much as they went up. On the day that the DOW dropped to 37% below its 200DMA in October of 1987 it was still 111% above it's price on Jan 2nd 1980 (1st wasn't a trading day), 1 year later in October 1988 you were up 25%.
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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