Market commentary by Hussman of Hussman Funds.
In mid-September, our estimates of prospective market return/risk dropped to the lowest figure we’ve observed in a century of market history (see Low Water Mark). That week turned out to be the high of the recent bull market, though it’s certainly too early to establish whether that was the ultimate peak. During the recent correction, I’ve noted a modest improvement in our return/risk estimates – which focus on a blended horizon looking out from 2-weeks to about 18-months. However, last week, the stock market experienced some significant damage to internals (breadth, leadership, price/volume measures, etc). As a result, our estimates of prospective return/risk have plunged lower again, to what is now the second most negative figure we’ve observed in a century of data – the September 14, 2012 weekly close of 1465.77 continues to mark the most negative estimate.
My intent in these weekly comments has always been to share what I am looking at, and what our analysis of the economy and financial market suggests – based on extensive historical data and every analytical tool we can bring to bear. There is no need to present the case as any better or worse than it is, but the simple fact is that our return/risk estimates for stocks dropped into the most negative 1% of historical data way back in March of this year, and the estimates we’ve seen since September have been even more extreme.
The S&P 500 has now underperformed Treasury bills for nearly 14 years, including dividends. The cycle since 2007 has been extraordinary in its economic, monetary and fiscal characteristics, not to mention the need to contemplate Depression-era data along the way. It’s undoubtedly easier to dismiss my present concerns as the rantings of a permabear than to understand the narrative of this particular market cycle. But for the benefit of those who do, I want to share my view that the statistical risk of severe market outcomes, given present observable data, has almost never been worse.
Guest post by Vix and more.
The S&P 500 index fell as low as 1388 today, down 86 points or 5.9% from its September 14th high of 1474.
The table below summarizes all the peak-to-trough pullbacks in the SPX since the March 2009 bottom. Note that while a 5.9% drawdown is right in the middle of the pack in terms of the magnitude of the drop, the 36 days that it has taken for stocks to fall that far makes the current pullback the fourth longest in terms of peak-to-trough duration. Of course, these statistics all assume that today’s low will mark a bottom – and while recent market action supports that thesis, there are no guarantees that SPX 1388 will hold.
Also worth noting is the fact that 2012 is the first year that has seen more than one pullback with a duration of at least a month. There are several ways to interpret this. One, of course, is that when there has been weakness as of late, that weakness has persisted for a long time. Another way to interpret the lengthy pullbacks might be that the tendency of the bulls to buy on the dips has diminished the likelihood of sharp downward moves in stocks.
Biderman on portfolio managers that only know of being long the market.
If you ask portfolio managers why stocks have not gone down? The answer can be bottom lined as the Bernanke Put. A key truth for those who believe in today’s School of What Works is that the Bernanke Put has been and will keep on saving the stock market.
For those of you who have been hibernating from the financial markets over the past few years, the Bernanke Put means that Wall Street believes that Fed Chairman Ben Bernanke is omnipotent; and that he can do whatever is takes to keep stock prices at around double the March 2009 lows. That is why most portfolio managers believe that any and all bad news cannot ultimately hurt stock prices.
Guest post by Vix and more.
Of all the periodic themes that I update in this space, the one that always surprises me by how strong of a reception it generates is a table that I call the VIX and More 2009-12 SPX Peak to Trough Pullback Summary – of which a current version is appended below.
The table is a chronology of sorts of all the significant pullbacks since the March 2009 bottom in stocks. I have tweaked the definition of pullback a little so that it only includes pullbacks from new highs. For that reason, there are no significant pullbacks since the SPX made a new high for the year back on September 6th. That being said, I am including the price action of the last two days as a provisional entry in red at the bottom of the table, with data as of one quarter of an hour to go in the trading day. Generally it takes a pullback of at least 2.5% – 3.0% to warrant inclusion in this table.
I suspect that the main reason investors enjoy this table is that it gives them some historical context for how the markets have recently been pulling back and thus helps to set expectations about how far the current or subsequent correction may extend. Prior to the current mini-pullback, the median pullback was 5.6%, while the mean pullback stood at 7.4%, thanks to several sharper corrections. Applied to Friday’s high of SPX 1474, these translate to a pullback to SPX 1392 or SPX 1365, respectively. Of course, this is where the “past performance is no guarantee of future results” type of disclaimer should be inserted, but historical parameters can help to set expectations.
I read report after report that pointed out the Bear Case. The Demise of Europe, Hard Landing in China, and Fiscal Cliff dominated the analysis, roughly in that order.
I agree with a lot of the Bear case. I can see it. I can argue it, heck, since much of it is focused on the bond market, I think I could argue it better than most. The problem with the bear case isn’t that it isn’t compelling, just that it hasn’t worked.
So what is wrong with the Bear Case?
For one, the bear case, in many instances is done with as much “fluff” as cheerleading bull arguments.
If Spain rolls 1 billion of debt, no new debt was created. Sometimes, the “debt on debt” argument is devolving into a rant. If a country can replace 4% average coupon debt with 2% average coupon, that is useful. It decreases current deficit. It reduces how much money has to be borrowed to pay interest. I’m not convinced this will happen, and I am concerned that the focus is on the short end, but average coupon does matter, access to cheap debt to roll old debt does matter. So this is one area where the bears are potentially too pessimistic.
Remember the old man, Joe Granville? In March he predicted the Dow would fall 4000 points in 2012. People laughed at him back then…
Volume precedes price. It sure is happening in Spain, Italy, Eurostoxx and other indices. Has the time come to the US markets?
Repeat after me; volume precedes price.
Futures are still trading, despite the Cash markets closed, and going lower. The European Stoxx and Dax futures have now taken out the Bail Out levels completely, just as we suggested in early European Trading. We believe the market has made the Top we have been waiting for, and the psychological set up is very interesting. A nasty correction is around the corner. Both Bulls and Bears have been run over, and the latest rally shook out the last bears, and attracted many new momos. MF Global imploding, Greece basically pulling the plug, are all ingredients for the dynamics to continue playing out. Below some “after hours” chart updates.
SPX “falling out” soon?
European futures below.