In his latest weekly note, fund manager John Hussman is… bearish on the market.
This has been his stance for a couple years now, and this week he looks at a technical indicator showing signs of excessive optimism:
As of Friday, the S&P 500 was within 1% of its upper Bollinger band at virtually every horizon, including daily, weekly and monthly bands. The last time the S&P 500 reached a similar extreme was Friday April 29, 2011, when I titled the following Monday’s comment Extreme Conditions and Typical Outcomes . I observed when the market has previously been overbought to this extent, coupled with more general features of an “overvalued, overbought, overbullish, rising yields syndrome”, the average outcome has been particularly hostile:
“Examining this set of instances, it’s clear that overvalued, overbought, overbullish, rising-yields syndromes as extreme as we observe today are even more important for their extended implications than they are for market prospects over say, 3-6 months. Though there is a tendency toward abrupt market plunges, the initial market losses in 1972 and 2007 were recovered over a period of several months before second signal emerged, followed by a major market decline. Despite the variability in short-term outcomes, and even the tendency for the market to advance by several per cent after the syndrome emerges, the overall implications are clearly negative on the basis of average return/risk outcomes.”
As it happened, April 29, 2011 turned out to mark the exact high of the S&P 500 for the year, and was followed by a steep intermediate market plunge. My impression is that despite the recent run of speculation the market has enjoyed – largely reflecting a reprieve in European debt concerns and what appears to be a drawing-forward of jobs into the first quarter due to unseasonably favourable weather – the extended implications of present market conditions remain decidedly negative.
What is the aforementiond Bollinger Band?
Per Investopedia: “A band plotted two standard deviations away from a simple moving average.”
Some traders see these bands as indicators of guide-markers of the market getting extreme in one direction or another.
Here’s a chart, via Stockcharts.com, showing that the S&P 500 is indeed at the high end of the Bollinger Band,” as it was last Spring.