First, we can agree to disagree as to what the appropriate P/E level fits the current economic climate, as valuation levels are highly subjective. I made my fundamental case against the higher P/E while others can make their case for the higher P/E (inflation factor noted above). But it's the second point I wish to make that's far more important: If enough investors, specifically institutional investors, buy into the higher P/E argument, then they'll make it so.

This second point is one that many individual investors rant and rave against in a fruitless effort to get others to agree with their logic. What I'm trying to say here, is that it doesn’t matter if you're right in principle. Pound the table all you want. You may even be right!

What matters, however, is if you're right at the end of the investment day. If everyone is crazy, then arguing for sanity just won’t work. And, in the process, money will be lost as the lunatics in charge of the asylum rule the roost until a more sane period returns. History is replete with examples of this madness of crowds - the tech bubble of the late '90s and the credit bubble of the past few years, being the most recent examples. Therefore, insisting on what should be is like spitting into the wind - it only comes back in your face.

Sell In May and Go Away?

The last area to explore is the historical record. Sam Stovall, Chief Investment Strategist with S&P, produces some of the very best historical data around. In one of his most recent commentaries, he notes:

“Since 1929, the S&P 500 gained 4.8% from November 1 - April 30 versus 1.6% from May 1 - Oct. 31. Also, the November - April period beat the May - October period 68% of the time. Yet after bear market bottoms, the S&P 500 gained an average 12.2% in May - October and advanced in 12 of 14 observations.”

The key phrase in Sam’s comments is “after bear market bottoms,” which means you have to buy the idea that the November 2008 lows was the low. In this regard, I'm not in that camp just yet. That’s not to say I think we'll take out the November low, but that things are much too fluid -- the stress-test results to be released next Monday being the most immediate area for concern -- for me to base my investment-strategy decisions on a high-risk "maybe."

Investment Strategy Implications

The internals of this market are deteriorating concurrent with high P/Es after a 32% rise from the lows, while entering a seasonally weak period for stocks (Stovall’s point well taken). All this points to an advisable lowering of the equity exposure in portfolios.

For those more hedge-oriented, selling short selected vulnerable areas of the market, such as emerging Europe (GUR) seems to be a good tactic to offset any long positions held.





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