John P. Hussman, Ph.D., president of Hussman Investment Trust, thinks the market is “undervalued” and guesses “that the general tenor of the market may remain tepidly positive for a few more weeks”. But, he warns we may “ultimately observe another frightening leg down in the first part of next year –- possibly to re-test the November lows”. Hussman doesn’t think the economy will begin to recover until the later part of 2009 and thinks stocks will most likely trade in a “very wide 25-35% range for months.”

Hussman breaks down bear markets in three parts — the “recognition, fear, and revulsion” stages. He describes these stages in detail, but says that the bear market’s final decline will come when we have “‘revulsion’ –- a growing impatience among investors who conclude that stocks are simply bad investments, that the economy will continue to languish, and that nothing will work to help it recover.”

Regarding market valuations, Hussman says that if we use a “conservative level of normalized earnings for the S&P 500 in the range of $65-70, the current level for the S&P 500 would put it at a price-to-normalized earnings multiple of 12.5 to 13.5, which is in the undervalued range, but certainly not near a historical low.” He agrees with PIMCO’s Bill Gross that earnings in the last economic expansion will not be the new norm as debt-financed leverage comes down across the board.