Bearish fund manager John Hussman says the latest selling is the classic version of how overvalued markets come to their end…
Since late-February, our estimates of the market’s prospective return/risk tradeoff (over a set of horizons from 2 weeks to 18 months) have persistently held in the worst 0.5% of all historical observations. It’s always important to emphasise that we try to align ourselves with the average return/risk profile that has historically accompanied the particular set of investment conditions we observe at each point in time, but that the outcome in any specific instance may not reflect the average return, and may even fall outside of what we view as the likely range of outcomes. That said, the awful behaviour of the market in recent weeks is very run-of-the-mill in terms of how similarly unfavorable conditions have usually been resolved historically, and there is no evidence that this awful prospective course has changed much. The chart I included three weeks ago in Dancing at the Edge of a Cliff presents similar periods for historical perspective.
It sounds like he expect some violent moves as we make our way to a real bottom…
We remain strongly defensive here, which will ideally be resolved by a sharp improvement in valuations followed by early improvement in market action, but we’ll respond to shifts in the evidence however conditions change. I doubt that we’ll be as defensive as we’ve been recently for a great while longer, but that’s another way of saying that I expect significant market events in fairly short order.
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