Hussman Economics still bearish
The Market Climate remains characterized by extremely unfavorable valuations and unfavorable trend uniformity. Current action is generating some
interesting disparities, and additional market action is necessary before the picture is resolved. On the positive side, Tuesday's rally generated some
improvement in our measures of trend uniformity - not enough to define a favorable shift, but reasonably good action nonetheless. At the same time, we
maintain an asset allocation model which has suddenly shifted to 100% Treasury bills. No bonds, no stocks, not even gold. That type of shift is extremely
rare, having occurred only 5 times in the past quarter-century. These include July 1981 (just before the 81-82 bear got angry), August 1987 (about a week
after the final bull market peak and about 6 weeks before the crash), July 1990 (just before another bear market plunge), August 1986 (a 3-week whipsaw
signal associated with no important action), and September 1999 (early, but timely enough).
If trend uniformity was to shift to a favorable condition, that shift would override every other model, forecast, or opinion that we carry. Favorable trend
uniformity moves us to a constructive position. The extent of that position depends on other factors, but we don't fight favorable trend uniformity. Nor do
we have such uniformity yet.
I cannot stress enough that stocks are currently priced to deliver very poor long-term returns. The only question is whether or not it is attractive to
speculate. The current rally is essentially a microcosm of the recent tech bubble, and prior bubbles such as 1929. In Benjamin Graham's immortal words,
investors have turned their attention from dividends, asset values and earnings, "to transfer it almost exclusively to the earnings trend." Investors are so
focused on the future trend of the economy and earnings that they are completely ignoring that stocks will be terribly overpriced even if a V-shaped
recovery and an earnings rebound materialize. The focus is the turn, the turn. For some reason, the level of valuations - even if that turn occurs - simply
doesn't enter into their calculus.
We don't invest on the basis of my opinions or anybody else's. We hold a position in line with the prevailing Market Climate, defined by valuations and
trend uniformity. That said, my opinion is that this rally is terribly overbought, and we are seeing a volatile top-formation. Such formations are often
marked by repeated attempts at resistance levels, followed by sharp pullbacks and then renewed attempts. Dow 10,000 appears to be about that resistance
area at present. Rallies like Tuesday's can generate quite a bit of bullish enthusiasm, as well as self-doubt from the bears, but in the context of the past few
weeks of action, it's not clear that we're seeing anything important.
My definition of "important" is simple. An important rally generates favorable trend uniformity. It's clear that we can earn very good returns without taking
on market risk. In a market that is priced to deliver very disappointing long-term returns, the only reason to take market risk is if broad action suggests a
compelling reason to speculate. That's what trend uniformity measures. No uniformity, no speculating. It's really that simple. Again, we can make money
without speculating on market risk. Only the greedy feel forced to "play" every rally. And greed ultimately charges its own price. We'll wait for more
evidence. For now, we remain defensive. |
