John Hussman’s latest weekly note out is out, and though he’s still bearish, the tone is a little bit different, as he reflects on the significance of the recent market decline.
He does note that base don his models, the market is in a better position today than it was a few weeks ago, with the 10-year prospective return having improved.
But the short and medium-term outlooks is still fairly negative.
He does produce an interesting chart in an attempt to examine the fate of markets after a downdraft like the one we’ve seen.
The chart below captures a fairly simple filter of instances when the market lost 5% or more over a 2-week period, from a market peak in the prior 6 weeks (within 5% of the prior 52-week high) that was characterised by a Shiller P/E over 19, more than 50% advisory bulls, and fewer than 25% advisory bears. So the bars simply identify quick initial declines from overvalued, overbullish peaks. But the fact that they coincide with so many important cyclical bull market peaks says something about how those peaks are formed.
Photo: Hussman Funds
It’s important to note that on long-term charts like this one, small distances actually represent weeks of data, including many days where stocks advanced and everything looked just fine on a near-term basis, so we certainly shouldn’t rule out the typical “fast, furious, prone-to-failure” rallies that usually punctuate extended market slides.
Note that with few exceptions, even when the near-term outcomes have been benign, the outcomes within the following 12-18 months have typically been terrible. Of course, this is one simple and imperfect measure. Our present defensiveness is based a far broader ensemble of evidence, as well an army of related syndromes. On the basis of objective data, we estimate the prospective market return/risk profile to be in the most negative 0.5% of all historical observations.
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