This week's was an especially good read. He spelled out a little market history comparing the current state of the market to past, similar periods.
December 1961 (followed by 28% market loss over 6 months)
January 1973 (followed by a 48% collapse over the following 20 months)
August 1987 (followed by a 34% plunge over the following 3 months)
July 1998 (followed abruptly by an 18% loss over the following 3 months)
July 1999 (followed by a 12% loss over the following 3 months)
December 1999 (followed by a 9% loss over the following 2 months)
March 2000 (followed by a 49% collapse in the S&P over the following 30 months)
According to Hussman those periods all share the following with today;1) price/peak-earnings multiple above 18
2) 4-year high in the S&P 500 index (on a weekly closing basis)
3) S&P 500 8% or more above its 52-week moving average (exponential)
4) rising Treasury and corporate bond yields
Hussman is quick to point out that he is not trying to make a prediction so much as create context for current market events.
This is an important distinction. The market can go any direction at any time for any reason or no reason. The general tone of Hussman's article ties in with what he has been writing for a while but the bullet points sum it up nicely.
Clearly these sorts of obstacles can exist for a long, long time without hurting the market. This is an argument for not making big bets to get out of the market for fear of a correction, bear market, crash or whatever else. I continue to be bearish (have been for a while and have been incorrect) but am so without missing the market. My trigger point for taking action is simple (a breach of the 200 DMA by the S&P 500) and has not been violated so I ride along skeptically thinking a turn will come soon.
Bear markets come so infrequently that guessing on the next one in a meaningful way is like to be the wrong trade. Hussman creates a great background of what stocks must continue to overcome go higher. The things Hussman cites or maybe subprime or maybe the dollar or something else will cause the next bear market at some point but time devoted to trying to nail the top is probably not productive.
16 comments:
"1) price/peak-earnings multiple above 18"
That is what I was just thinking about tihs weekend. I've become a little paranoid of big p/e's after the late 90s.
I'm not a market timer, but I've not going to make any investments for a while, just to hunt for a bargain.
Stephen I asked in another topic but you may have missed it. Can you share your ideal ETF portflio with us?
Thanks
It's a hybrid, as you can imagine. This isn't really the place to discuss it, so click through to my lame blog and email me using the link there if you like.
Typical of the scare-mongering that the underperforming John Hussman is guilty of. Here are four-year returns for the time periods John's trying to "compare" to today.
December 1961: +73% to +84%, depending on the day of the month.
January 1973: +12% to +18%, depending on the day of the month.
August 1987: +93% to +106%, depending on the day of the month.
July 1998: +141% to +158%, depending on the day of the month.
July 1999: +138% to +154%, depending on the day of the month.
December 1999: +126% to +144%, depending on the day of the month.
March 2000: +109% to +141%, depending on the day of the month.
So in six of his seven instances, of which, oddly (or NOT so oddly) four come from the same bull market, when the S&P had returned 2-3 times as much as it has over the last four years (about 50%). The seventh instance is most decidedly NOT similar to today, as it was in the midst of a bear market, and not a four-year bull market.
I'm calling bullshit (again) on Hussman.
bill, thanks for the context on the context (if that makes sense).
I do believe this sort of look at history is useful. You have looked at his process and drawn your own conclusion which is an important thing WRT to what this blog is about, TY.
A quick look at the S&P on Yahoo shows December 1999 around 1300ish. Four years later December 2003 it looks around 1100. Now how did Bill calculate the +126% return?
I am not going to check the rest of the alleged returns, but Hussman is a intelligent great guy who has happened to be wrong for a while now. Happens to the best of us.
Although I will admit I have gone from 90+% invested to 33% invested in the last 6 trading days.
Yes it is a big bet but I agree with Hussman and the ADV/DEC along with the high number of new lows do not paint the picture of the start of a new Bull leg to me anymore.
"The market can go any direction at any time for any reason or no reason."
'nuff said
Bill might be referring to the 4 years PRIOR to each of the dates in question
"Bill might be referring to the 4 years PRIOR to each of the dates in question"
Talking a bought four years PRIOR to refute Hussman's FORWARD PROJECTIONS is as Spock would say illogical
A bit more, um... context for Bill's numbers would be helpful. Along with time period and raw data used what is the calculation method? Are the numbers a percentage change in some index over four years? If so that number is unlikely to reflect an investor's actual performance.
"when the S&P had returned 2-3 times as much as it has over the last four years (about 50%"
(Bill: I apologize if I'm putting words into your mouth) I think he may have been talking about the % runup of the current bull market to date vs. the % runup prior to the other periods mentioned--to point out that we may be in different stages. I'm not saying that I agree or disagree, but I think that's what he might be referring to.
As always, the devil is in the details. Hussman fails to mention that the first 3 criteria have occurred many times without dire consequences. The clincher is the 4th criterion, rising bond yields in conjunction with the other three. Furthermore, it's the degree of the rise that is important. I don't have the bond yield data in front of me, but it's my recollection that bond yields rose significantly in 1973 and '87. By comparison, the yield rise we have experienced in the last year is relatively small. I think a 6% yield or higher is needed before this market gets into real trouble.
"a breach of the 200 DMA by the S&P 500"
I am not quite sure what that means... Below about 1450?
Great comment about interest rates from Greg Cook, but I am going to disagree with Greg any way. If you only look at the Fed interest rates are not rising to support a market down turn. But if you look at the sharp increase in credit spreads you see a sharp rise in interest rates for a lot of the crap that funds buyouts , mergers etc. (see link below)
http://bespokeinvest.typepad.com/bespoke/2007/07/a-look-at-high-.html
This will lead to a lot less liquidity for the markets. A lot less liquidity is really the consequence of Greg Cooks comment about 6% yields. So why Greg has a great point I suggest people look at the decrease in liquidity due to the increase in credit speads instead of just focusing on the fed and treasurries.
Bottom line the market is richly valued and liquidity is starting to decrease in spite of the feds inaction.
Nice coverage of Hussman, Roger. Rather than waiting for a breach of the 200 DMA by the S&P 500 to become cautious, you might study trend reversals after periods when the S&P 500 has moved FAR above the 200 day moving average -- say 7% or more (as we are now). The data argues pretty convincingly for at least a short-term downturn.
My numbers represent the percentage run-up INTO the date in question.
Today, we have not run up nearly as much as we had in the other time periods that Hussy marks as excessive (disregarding the one bear-market incidence); because our current four-year returns have been mild compared to the other times mentioned, I think Hussy's comparison falls short, logically speaking.
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