7 replies to this topic

[nimblebear]

http://www.hussmanfu...c/wmc070115.htm

Hazardous Ovoboby

Overvalued
S&P 500 price/peak earnings greater than 18

Overbought
S&P 500 at a 4-year high, and at least 5% higher than its level 6 months earlier

Overbullish
Investors Intelligence percentage of bullish advisors above 53%

Yield pressure
3-month Treasury yield higher than its level of 6 months earlier


Here is an exhaustive list of the instances where we've observed this set of conditions on a weekly closing basis (I've used Dow Jones Industrials data for easy reference):

April 30, 1965: The Dow advanced less than 2% to its May 14, 1965 peak, 10 trading days later. The Dow then skidded -10.5% lower over the next 30 trading days.

December 18, 1972 and January 5, 1973: The Dow advanced less than 2% from the first instance, and a fraction of a percent from the second instance, to its bull market peak on January 11, 1973. The Dow then toppled -12.3% over the next 50 trading days, and collapsed to half its value over the following 22 months.

August 14, 1987 and August 21, 1987: No remark is really necessary, but for the record, the Dow advanced less than 2% from the first instance, and a fraction of a percent from the second instance, to its bull market peak on August 25, 1987. The Dow then crashed -36.1% over the following 38 trading days.

April 3, 1998: The Dow advanced another 2.5% over the following 6 weeks to a preliminary high on May 13, 1998, and quickly dropped -6.3% over the following 22 trading days. The market then enjoyed a short-lived 8.1% rebound over the next 22 trading days to a fresh high on July 16, 1998, before suddenly plunging -19.1% to its August 31, 1998 low, 32 trading days later (overall, a -16.1% loss from its April 3 level).

April 23, 1999: From a longer-term perspective, the market was already floating on the suds of the late-1990's bubble. Indeed, despite the recent high in the S&P 500, its total return has underperformed Treasury bills in the years since then. Still, from a short-term perspective, this was the most benign instance on the list. The Dow advanced less than 3% to a peak on May 10, 1999, followed by a selloff of -4.9% over the next 13 trading days. The lack of a deep correction, however, left subsequent gains open to repeated selloffs, erasing them even before the bear market began in earnest.

July 2, 1999 and July 16, 1999: The Dow advanced less than 2% from the first instance and about 1% from the second instance, to a peak a few weeks later on August 25, 1999. The Dow then fell -11.5% over the next 36 trading days.

December 23, 1999 and December 31, 1999: The Dow advanced less than 3% from the first instance and less that 2% from the second instance to the final peak of the market bubble a few weeks later, on January 14, 2000. The Dow then plunged -16.4% over the next 35 trading days.

March 24, 2000: The actual bull market high already behind it, the Dow had enjoyed a bounce off of an early-March low. It advanced less than 2% further, to a short-term peak 12 trading days later. The Dow then dropped -8.8% over the following 32 trading days. Over the following 30 months, the stock market would lose half its value.

November 17, 2006, December 8, 2006 and January 12, 2007: We'll find out shortly...

To visualize these instances in a somewhat longer-term context, they are depicted with shaded vertical lines on the graph below. The chart presents the total return of the S&P 500, including dividends (log scale). Note that in every instance, you can find a later point – often years later – where the market had made no net progress. This underscores the fact that while valuation may not pose much resistance against short-term or intermediate-term market advances (even over a period of a few years), it is the overwhelming determinant of long-term market outcomes. Investors focused on long-term, sustainable, risk-managed returns should have very little concern about having a defensive position here, even if the market continues somewhat higher in the short-term.


And Abruptness

Reviewing the foregoing instances carefully, one of the striking features that emerges is the abruptness of the declines. -10.5% in 30 days, -12.3% in 50 days, -36.1% in 38 days, and so forth. The first several days of decline from a market peak has often erased weeks and sometimes months of prior net gains. It's that tendency for abrupt declines from overvalued, overbought, overbullish conditions that has held us to a defensive position despite market action that otherwise looks “good” and has repeatedly produced marginal new highs.

Normally, market internals deteriorate in a way that provides more time to establish a defensive position – market breadth lags, divergences develop across various industries and security types, price/volume action shows signs of distribution and so forth.

The overvalued, overbought, overbullish syndrome may present none of those warnings, particularly when there is even modest upward movement in Treasury yields.

[jawndissedi]

Geez -- does this mean picking up nickels in front of a steamroller might not be such a great idea?

[snorkels4]

Normally, market internals deteriorate in a way that provides more time to establish a defensive position – market breadth lags, divergences develop across various industries and security types, price/volume action shows signs of distribution and so forth.

The overvalued, overbought, overbullish syndrome may present none of those warnings, particularly when there is even modest upward movement in Treasury yields.


xd??

4 more years

My Webpage

[dcengr]

Normally, market internals deteriorate in a way that provides more time to establish a defensive position – market breadth lags, divergences develop across various industries and security types, price/volume action shows signs of distribution and so forth.

The overvalued, overbought, overbullish syndrome may present none of those warnings, particularly when there is even modest upward movement in Treasury yields.


xd??

4 more years

My Webpage

Those that believe the 4 year cycle is behind us should look back in history to 1937, 1946, 1966, 1987. It would seem that the passing of a date where one would expect the 4 year low often causes a rally which builds upon the shallow correction that was presumed to be the 4 year low, causing the market momentum structure to go even more out of balance. Then, when many believe they are out of the woods for another 4 years, it strikes.

At least that's one version of it. Maybe the 4 year cycle is behind us and we're going to da moon!

[snorkels4]

dc, im just cuttin and pastin but ists hard to see primary wave III up here fundamentally even though it looks like it in momo indicators and liquidity picture. but, what the heck do i know

so, dont believe the trend is true? this is poker or track bettin not investing (i never thought it was anyway)

xd may be right and hes a hard fade like the megabulls around her so, if you gonna play, buy qid and qld and sit tight

but, liquidity, liquidity, liquidity is everpresent and the dollar recycling machine is$%^&*()

mish has a new Liquidity measure :M prime::

My Webpage

My Webpage

Edited by snorkels4, 20 January 2007 - 01:16 PM.

[dcengr]

dc, im just cuttin and pastin but ists hard to see primary wave III up here fundamentally even though it looks like it in momo indicators and liquidity picture. but, what the heck do i know

so, dont believe the trend is true? this is poker or track bettin not investing (i never thought it was anyway)

xd may be right and hes a hard fade like the megabulls around her so, if you gonna play, buy qid and qld and sit tight

but, liquidity, liquidity, liquidity is everpresent and the dollar recycling machine is$%^&*()

mish has a new Liquidity measure :M prime::

My Webpage

My Webpage

Always room for doubt (waiter, I'll take another order of humble pie please!) .

I'll quote PTJs:

Don't be a hero. Don't have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.

[pdx5]

<<<Geez -- does this mean picking up nickels in front of a steamroller might not be such a great idea?>>> Especially if the nickels are laying on top of wet concrete....as in the movie "A fish called Wanda" one of my favorites besides North by Northwest, Day of the Jackal and Von Ryan's Express.

[Echo]

While I have respect for Hussman and his analysis, it should be noted that the NY adv-dec line is making new highs as of this week and is in a bullish configuration with respect to the 1%, 5%, and 10% trendlines. In addition, the McSum is solidly in positive territory. This represents significant liquidity available at this time.

Take a look at the AD line and McSum for April 1998, April-July-Dec 1999, and March 2000 for a different picture. So things are a bit different now.

That said, the AD line is now above its 1% trend by enough that a corrective move would be reasonable and once that starts, a decent drop could easily happen into the March-April 9 month low discussed by Fib which also corresponds to the Hurst 20wk low due late March noted by Airedale.



Echo

Edited by Echo, 21 January 2007 - 11:54 AM.