Talking Value With Tweedy's Bob Wyckoff

But while the median P/E was around 13, you also had some insane valuations in the tech sector -- like Cisco (CSCO Quote) at over 140 times earnings -- which were bringing up the overall P/E of the market to between 25 and 30. That meant that half the index was pretty cheap.

With the resurgence in value stocks and with the collapse of tech and telecom, we now have a median P/E that is closer to 18 times earnings. That means the deep value segment of the market has risen. And if you are like us and require a 30% to 40% discount from a cautious level of real world valuation, you just can't find stocks to buy.

So the idea flow has come to a crawl and we have become net sellers of securities. Cash is building in the funds, upwards of 20%, and we feel that in this environment it would be irresponsible to keep our funds open.

I'm not sure if this is a bearish or bullish argument for the overall market. What do you think?

We don't make any market forecasts. But I don't think we are going to fall off a cliff in terms of valuation. We just think prices are pretty full. The normalized P/E for the S&P 500 over very long periods of time is somewhere around 14 or 15. So if the P/E today is slightly above that level, we are not in an insanely expensive territory. We are just fully valued, which makes the risk higher for value stocks. But we don't hypothesize a big correction in the future.

If value is expensive, does that make growth stocks cheap?

I think the growth guys are saying that. They are making the argument that the kinds of companies they like are trading at only a modest premium to the multiples of value stocks. That suggests to them that their stocks may be cheap. But a deep value manager might say both value and growth are too expensive.