John Hussman published his Weekly Market Comment on Monday, discussing whether the market is having "overvalued, overbought, overbullish, rising-yields syndrome." Below is an excerpt; the full article can be read here.
We know that weak prospects for the market over a horizon of years does not necessarily translate into weak market prospects over a horizon of months. The ensemble methods we introduced last year have a greater tendency to accept moderate, if periodic, investment exposures - even in quite overvalued markets. But even with our present methods, the odds for the market are now quite bad, and I have no intent of accepting needless risk in historically hostile market conditions in order to prove our willingness to accept greater market exposure more generally.
Even here, we would be willing to establish a moderate, if transitory, exposure to market fluctuations (though with a line of index put defense against extended weakness in any event) even on modest events that "clear" the present syndrome. For example, provided that a market decline isn't severe enough to damage broad market internals (breadth, leadership, industry uniformity, price/volume behavior, credit spreads, and so forth), it would be enough for sentiment to retreat to perhaps 45% bulls, or for 10-year Treasury yields decline below their level of 6 months ago. At this point, we would probably require a market decline of more than 6% to clear the "overbought" component, but there are other combinations that could be sufficient to shift the short- to intermediate-term return/risk profile to a more favorable condition. In any event, however, three things should be clear: 1) we have significant concerns about longer-term market outcomes, 2) market conditions don't not rule out the possibility of further gains or extended sideways movement over the short- and intermediate-term, but the odds are poor, and 3) we are willing to establish moderate, transitory exposure, albeit with a line of index put option protection in any event, if we can clear some component of the present syndrome, but the evidence is strongly against more aggressive positions.
We know that weak prospects for the market over a horizon of years does not necessarily translate into weak market prospects over a horizon of months. The ensemble methods we introduced last year have a greater tendency to accept moderate, if periodic, investment exposures - even in quite overvalued markets. But even with our present methods, the odds for the market are now quite bad, and I have no intent of accepting needless risk in historically hostile market conditions in order to prove our willingness to accept greater market exposure more generally.
Even here, we would be willing to establish a moderate, if transitory, exposure to market fluctuations (though with a line of index put defense against extended weakness in any event) even on modest events that "clear" the present syndrome. For example, provided that a market decline isn't severe enough to damage broad market internals (breadth, leadership, industry uniformity, price/volume behavior, credit spreads, and so forth), it would be enough for sentiment to retreat to perhaps 45% bulls, or for 10-year Treasury yields decline below their level of 6 months ago. At this point, we would probably require a market decline of more than 6% to clear the "overbought" component, but there are other combinations that could be sufficient to shift the short- to intermediate-term return/risk profile to a more favorable condition. In any event, however, three things should be clear: 1) we have significant concerns about longer-term market outcomes, 2) market conditions don't not rule out the possibility of further gains or extended sideways movement over the short- and intermediate-term, but the odds are poor, and 3) we are willing to establish moderate, transitory exposure, albeit with a line of index put option protection in any event, if we can clear some component of the present syndrome, but the evidence is strongly against more aggressive positions.
