In his latest note, John Hussman argues that it’s one of the worst times to invest. Period.
Based on his proprietary soup of risk indicators for the market, the current exuberant situation puts it on par with some of the great peaks, including 1998-2000.
Importantly, the market is again characterised by an extreme set of conditions that we’ve previously associated with a “Who’s Who of Awful Times to Invest.” The rare instances we’ve seen this syndrome historically are reviewed in that previous weekly comment. They include the 1972-73 and 1987 market peaks, and several instances since 1998. The more recent instances of this syndrome are shown by the blue bands on the chart below. Note that each of the separate instances in the 1999-2000 period were followed in short order by intermediate market declines of between 10-18%, and of course, ultimately by a plunge of more than 50% in 2000-2002. Likewise, the 2007 instance was followed in short order by a correction of nearly 10%, and a few months later by a plunge of more than 50% in 2007-2009. The more recent instances in 2010 and 2011 have also been followed by substantial market selloffs in each case, though with a longer lag in 2011 (due to ongoing QE2 operations). Aggressive monetary policy did not prevent the ultimate declines, though massive central bank interventions have undoubtedly helped to short-circuit the more violent follow-through that occurred in 1973-1974, 1987, 2000-2002, and 2007-2009, at least to-date.
Photo: Hussman Funds
A word of caution. While a few of the highlighted instances were followed by immediate weakness, it is more typical for these conditions to persist for several weeks and even longer in some cases (for example, the wide blue strip in late-2010 and early 2011). When we look at longer-term charts like the one above, it’s easy to see how fleeting the intervening gains turned out to be in hindsight. However, it’s easy to underestimate how utterly excruciating it is to remain hedged during these periods when you actually have to live through day-after-day of advances and small incremental new highs that are repeatedly greeted with enthusiastic headlines and arguments that “this time it’s different.” For us, it’s particularly uncomfortable on days when our stocks don’t perform in line with the overall market, or when the “implied volatility” declines on our option hedges.