HUSSMAN: Investors Don’t realise How Quickly All Of Their Recent Profits Could Get Destroyed

john hussman

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In his latest weekly note, John Hussman is very bearish and he blasts the Fed for not correctly fixing the economy.This is very standard for him.

One interesting observation regards the fragility of investor gains:

The stock market is only a few per cent from its 6-month high at present, and even an overextended move to about 1490 would put the S&P 500 at its upper Bollinger band (two standard deviations above the 20-period moving average) on daily, weekly and monthly resolutions. That’s something that we saw back in early 2011 (see Extreme Conditions and Typical Outcomes), when the S&P 500 Index was only about 5% below where it is today, and again in September 2012 (see Low Water Mark) when the S&P 500 was above where it is today. Overextended moves like that, coupled with other features of an overvalued, overbought, overbullish syndrome, are typically associated with awful outcomes over the following 6-18 months, though not always immediately.

Aside from the early 2011 instance, which was followed by a nearly 20% plunge before Bernanke launched QE2, and the September 2012 instance, the outcome of which remains to be seen, other points where the S&P 500 has reached its upper Bollinger band on a monthly resolution, an overvalued Shiller P/E above 18 (S&P 500 divided by the 10-year average of inflation-adjusted earnings), a 20-point spread between advisory bulls and bears, and an overbought S&P 500, 8% above the 52-week average and at least 50% above its 4-year low include: early 2007 and late 1999 – both just before separate 50% market losses, mid-1998 before the market plunge associated with the Asian crisis, August 1987 before the October 1987 crash, and late 1972 as the market rolled over into a 50% market plunge. Notably, one instance – the span from mid-1996 to early 1997 during the late-1990’s market bubble – was followed by strong continued gains. While the 2009 market decline wiped out the entire total return that the S&P 500 had achieved in excess of Treasury bills, all the way back to June 1995, it’s fair to note that overextended market conditions did not produce losses in short-order in the midst of that bubble.

Following each market setback of the past few years, the kick-the-can rebounds back to overvalued, overbought, overbullish conditions have made the market seem like it is boundlessly running away. The reality is that the S&P 500 Index is presently within 5% of its level of April 2011 – more than 18 months ago – and even a few weeks ago the index was within about 11% of its April 2010 level. A correction comparable to the ones we observed separately in 2010 and in 2011, and not even qualifying as a bear market, would wipe out the total return of the S&P 500 since early 2010 (the point that our present ensembles would have moved away from a significant and sustained exposure to market risk). Since then, the market has been a chronicle of shakeouts from overbought highs and rescues at the first sign of material weakness. What has changed over the past few years, relative to history, is the enormous effort by the Federal Reserve to short-circuit not only ordinary corrections, but also the deeper and more typical resolution of the market cycle.

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