Here is an excerpt from John Hussman Ph.D.'s Weekly Market Commentary:
Last week did a great deal of damage to our measures of market internals, suggesting that investors have shifted measurably toward risk-aversion in an environment where risk premiums are very thin. Historically, this combination of unfavorable valuations and unfavorable market action is strongly associated with a negative return/risk profile. However, we've also reached this point after six consecutive down-weeks, so the short-term condition of the market is fairly compressed and open to a fast, furious rebound to relieve that compression. The prospects for that would admittedly be better if there was less complacency among investors. Even after these consecutive declines, the CBOE volatility index (VIX) is still only about 18% (the VIX tends to spike toward 30% or higher at points where investors can reasonably be viewed as "fearful"). Likewise, though Investors Intelligence reports that the percentage of bullish investment advisors has pulled back modestly, most of them have simply gone to the "correction" camp, suggesting that the confidence in a rebound is still fairly universal. The percentage of bearish investment advisors remains way down at 22.6%. Overall then, we're seeing a measurable and potentially dangerous breakdown of market internals in an environment where risk premiums remain very thin. Short-term conditions are fairly compressed, which invites a rebound, but the expectations for that have to be tempered by the still-complacent sentiment of investors. Indeed, about the only areas where we see real concern is in measures where such concern is actually predictive (rather than being a contrary indicator). These include widening interest-rate spreads in peripheral European debt, and surging credit-default swap spreads for major U.S. banks.
A few notes on the banking sector. My view continues to be that the massive interventions of recent years have essentially kicked the can down the road, encouraging a writing-up of assets that are still not performing. The same basic view applies to European interventions to buy time for countries like Greece and Portugal. The problem is that while we have bought time, at great expense, our policy makers continue to waste that time by failing to prepare the markets adequately for debt restructuring.
To continue reading the article, click here.
Last week did a great deal of damage to our measures of market internals, suggesting that investors have shifted measurably toward risk-aversion in an environment where risk premiums are very thin. Historically, this combination of unfavorable valuations and unfavorable market action is strongly associated with a negative return/risk profile. However, we've also reached this point after six consecutive down-weeks, so the short-term condition of the market is fairly compressed and open to a fast, furious rebound to relieve that compression. The prospects for that would admittedly be better if there was less complacency among investors. Even after these consecutive declines, the CBOE volatility index (VIX) is still only about 18% (the VIX tends to spike toward 30% or higher at points where investors can reasonably be viewed as "fearful"). Likewise, though Investors Intelligence reports that the percentage of bullish investment advisors has pulled back modestly, most of them have simply gone to the "correction" camp, suggesting that the confidence in a rebound is still fairly universal. The percentage of bearish investment advisors remains way down at 22.6%. Overall then, we're seeing a measurable and potentially dangerous breakdown of market internals in an environment where risk premiums remain very thin. Short-term conditions are fairly compressed, which invites a rebound, but the expectations for that have to be tempered by the still-complacent sentiment of investors. Indeed, about the only areas where we see real concern is in measures where such concern is actually predictive (rather than being a contrary indicator). These include widening interest-rate spreads in peripheral European debt, and surging credit-default swap spreads for major U.S. banks.
A few notes on the banking sector. My view continues to be that the massive interventions of recent years have essentially kicked the can down the road, encouraging a writing-up of assets that are still not performing. The same basic view applies to European interventions to buy time for countries like Greece and Portugal. The problem is that while we have bought time, at great expense, our policy makers continue to waste that time by failing to prepare the markets adequately for debt restructuring.
To continue reading the article, click here.
