We recently highlighted Steven Leuthold’s 2010 outlook, noting that the longtime bear who turned bullish last year is optimistic on the first half of the new year, but pessimistic on the second half.

In a recent speech highlighted by Advisor Perspectives, Leuthold expanded on that outlook and offered his thoughts on the current market. He says that stocks are currently trading for about 16.5 to 17.5 times normalized earnings — “not richly valued but somewhat overvalued.”  Advisor Perspectives notes that about half the equities in his asset allocation fund are foreign firms, and about 60% of that is in emerging markets. He is trimming back some of his China investments in favor of plays in other Asian countries, such as Singapore, Thailand, Korea, and Vietnam.

Leuthold is bearish on bonds, with his asset allocation fund having about one-third the amount of bond exposure (11%) that it usually does (30%), according to Advisor Perspectives. He’s shorting long-term Treasuries, saying that yields will rise because of inflation or fears about the dollar. With his bond exposure reduced, he’s looking to high-yield stocks like Altria and Reynolds as a substitute for fixed income investments.

As for what to expect in 2010, Leuthold says  retail investors will on the whole continue to sell stocks, but institutional investors will be buyers, and “relative good news from earnings announcements will lead to growing enthusiasm and a 16-20% gain in the stock market in the first six months of this year.” That will push the S&P 500 to the 1,300-1350 range, and normalized P/E ratios to 19-21.

At that point, equities will be “clearly overvalued”, Leuthold predicts. Election pressure on politicians will lead to irresponsible spending by Congress, and the market will correct; it could lose 15% to 20%, Leuthold says.

Two other interesting predictions from Leuthold: He says gold is undervalued and should trade between $985 and $1,600 in 2010, and he says he expects the Euro will meet its demise in the next five or six years.