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A Hint of Advance Warning - John Hussman

August 04, 2014
Canadian Value

Canadian Value

112 followers

“Remember how these things unwound after 1929 (even before the add-on policy mistakes that created the Depression), 1972, 1987, 2000 and 2007 – all market peaks that uniquely shared the same extreme overvalued, overbought, overbullish syndromes that have been sustained even longer in the present half-cycle. These speculative episodes don’t unwind slowly once risk perceptions change. The shift in risk perceptions is often accompanied by deteriorating market internals and widening credit spreads slightly before the major indices are in full retreat, but not always.”

Yes, This is an Equity Bubble, Hussman Weekly Market Comment, July 2014

“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.

“So while I recognize that my insistence on defensiveness may appear to be interminably stubborn and at odds with ‘obvious’ trends, it is precisely the apparent obviousness of those trends that contributes to my uneasiness. At the late 1972 – early 1973 peak market listed above, Barron's annual investment ‘roundtable’ was accompanied by the title ‘Not a Bear Among Them.’ It's notable that the latest roundtable just published by Barron's reflects an identical uniformity of optimism.”

Hazardous Ovoboby! Hussman Weekly Market Comment, January 2007

“Abrupt market weakness is generally the result of low risk premiums being pressed higher. There need not be any collapse in earnings for a deep market decline to occur. The stock market dropped by half in 1973-74 even while S&P 500 earnings grew by over 50%. The 1987 crash was associated with no loss in earnings. Fundamentals don't have to change overnight. There is in fact zero correlation between year-over-year changes in earnings and year-over-year changes in the S&P 500. Rather, low and expanding risk premiums are at the root of nearly every abrupt market loss. One of the best indications of the speculative willingness of investors is the ‘uniformity’ of positive market action across a broad range of internals. Probably the most important aspect of last week's decline was the decisive negative shift in these measures.”

Market Internals Go Negative, Hussman Weekly Market Comment, July 2007

Historically-informed investors are being given a hint of advance warning here, in the form of a strenuously overvalued market that now demonstrates a clear breakdown in internals. We observe these breakdowns in the form of surging credit spreads (junk bond yields versus Treasury yields of similar maturity), weakness in small capitalization stocks, and other measures. These divergences have actually been building for months, but rather quietly. Note, for example, that as the S&P 500 pushed to new highs in recent weeks, cumulative advances less declines among NYSE stocks failed to confirm those highs, while junk bond prices were already deteriorating. We don’t take any single divergence as serious in itself, but the accumulation of divergences in recent weeks should not be ignored. Notably, the majority of NYSE stocks are now below their respective 200-day moving averages (which again, isn’t serious in itself, but feeds into a larger syndrome of internal breakdowns in a market that remains strenuously overvalued).

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Canadian Value
http://valueinvestorcanada.blogspot.com/

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