“Though
the market has not recovered to its February highs here, the measures that
define the "overvalued, overbought, overbullish, rising yields"
syndrome are actually worse now, on balance. While there remains a possibility
that we can clear some component of this syndrome without also observing a
strong deterioration in broader market internals...conditions are so extended
here that there is now only a narrow "window" between a market
decline that would be sufficient to clear the overbought or overbullish
components of the present hostile syndrome, and a market decline that would
signal a larger and more robust shift toward investor risk aversion. Put
simply, a market decline that clears this syndrome could be a whopper.” - John P. Hussman, Ph.D.,11 April 2011 Weekly
Market Comment, http://www.hussmanfunds.com, used with permission.
To clarify an important point, Dr. Hussman makes no
prediction that the market decline is upon us now. He suggests that there is instability and we
don’t know when the next shoe (bricks in his analogy) will fall. (See his commentary this week for a fascinating
discussion of the market and especially Federal Reserve issues.)
I don’t know if the whopper correction is here either,
but our NTSM model told us to leave the market 22 February. Until the NTSM analysis improves, I will stay
extremely defensive.
The NTMS Sentiment indicator is 67% today and for
the fifth straight day it is a SELL (greater than 65% bulls). The indicator is calculated from a 5-day
moving average of Rydex 2x funds (leveraged mutual funds that are long or short
the market). I have records for this
indicator going back to July of 2006; I have never seen this much sustained Bullishness…period. Too much bullish sentiment is a counter
indicator and actually is negative for market expectations, i.e., a correction
is likely, though not guranteed.
NTMS
switched to SELL on 22 February. Since
then, NTMS analysis has been Sell or Hold (it remained Hold today); therefore, I
am still conservatively positioned with only 30% invested in stocks. In order to further hedge my position, I went 2xshort with 50% of my trading
portfolio using QID and Inv Rydex 2xNazdaq fund today. (My trading portfolio is roughly 10-15% of the long term portfolio.)
