JOHN HUSSMAN - CYCLICAL BEAR WARNING (what’s new?)
"Last week, the S&P 500 advanced the extra 1% required to re-establish virtually every “overvalued, overbought, overbullish, rising-yields” syndrome that we define – syndromes that have appeared at or close to the beginning of what investors can easily recall as the singularly worst set of market instances in history, including the 1973-74, 1987, 2000-2002, and 2007-2009 plunges. With some minor imputation (estimating bullish and bearish sentiment as a function of the extent and volatility of prior market movement), we can verify that these syndromes also emerged just prior to the 1929-1932 collapse.“ - John P. Hussman, Ph.D., 22 January 2013 Weekley Market Commentary, Hussman Funds. Full commentary at..http://www.hussmanfunds.com/
John Hussman noted that there have been some instances where this syndrome did not result in downturns, most notably in 1997 several years before the top. He cautioned, however, that fully 5-years after the 1997 syndrome was established the S&P 500 was unchanged and went on to underperform Treasuries for more than a decade.
We can also note that this warning is similar to those John Hussman issued nearly a year ago and the markets have advanced about 5% since then. Whether 5% gain is worth the risk of 20-50% loss is really a decision that each investor must make. I don’t mean to overstate the negatives here, but this is a major part of the reason I am currently only 50% invested in stocks rather than my usual reckless, roll-the-dice position of 100% invested in stocks.
The catalyst for major declines has usually been a significant event, economic or otherwise. Sometimes major events are foreseeable. In 2001 we had extreme valuation and the catalyst for the start of the Bear market was Fed tightening to cool the economy – boy, did it ever! In 2007 the catalyst was overblown housing prices that caused a Banking crisis coinciding with a market top that matched the 2001 top. In both of those cases I was able to exit the market within about 5% of the top.
As we approach the 2001 top once again {now only 4% below the 1560 (approximately) all time top} we must ask, “Is there a catalyst that will trigger a major decline?” Candidates are world-wide debt; currency wars; European/Asian recession; US Recession; US Debt; Political Gridlock; Declining profit margins and probably a few others.
On an optimistic note, only declining profit margins looks like an immediate issue (to be resolved in the current earnings season) and it may take months before any of the issues will rise to crisis levels, if at all.
Lesser, but significant contractions in the markets have been preceded by unforeseeable events such as 911, the Japanese nuclear crisis or earthquakes in Taiwan.
Regarding earnings, Apple reports tomorrow after the close and it will be widely watched to indicate the future of tech earnings.
HISTORY SUGGESTS ANOTHER DOWNTURN
Doug Short presents an interesting history of the Dow Jones Industrial Average adjusted for inflation. He notes that Bear markets have usually had 2 or 3 lower-lows. So far, the Dow has suffered 1 lower-low in the current bear market. This is just another way of warning that the current Bear probably has at least 1-more major downturn before the markets can escape from the clutches of the Bear. Chart from dShort.com (Doug Short Advisor Perspectives).
http://advisorperspectives.com/dshort/charts/markets/Dow/recoveries.html?sixteen-real-recoveries.gif
THE REAL HOUSING RECOVERY – Lance Roberts, January 22, 2013
“The headlines read that "Housing starts surged by 12.1% in December proving that the housing recovery is back." In reality the numbers were as follows:
-December starts: 61,500 (down 2.8% from November)
-Annualized December starts:
738,000-Reported seasonally adjusted December starts: 954,000 (Up 12.1% from November)
-Seasonal adjustment to December starts: +216,000
Historically, the data smoothing
methodology was "close enough" and the variations were, more or
less, worked out over time. However, in the current economic environment,
the seasonal adjustment process may be overstating that actual activity that is
occurring within the underlying economy. With housing currently making a
very small contribution to overall economic activity, just slightly more than
2.5% as shown in the chart below, the difference between the "real"
economic impact of 61,500 homes being started nationwide versus 954,000, of
which 216,000 were a mathematical seasonal adjustment, can be quite dramatic.“
Full story at…http://www.streettalklive.com/daily-x-change/1468-the-real-housing-recovery-story.html
MARKET RECAP
Tuesday, the
S&P 500 was up 0.4% to 1493 (rounded).
VIX fell 0.2%, to 12.43.
NTSM
The NTSM analysis
remained HOLD Tuesday.
Only one
indicator, Price, is positive.
Sentiment, Volume and VIX are all neutral.
MY INVESTED
POSITION
Based on a BUY
signal 7 of 9-days, and more importantly, consecutive closes above the prior
high of 1466, I moved into the stock market at 1471 on the S&P 500 on 14
January. I am currently invested in a
range of near 50% invested in stocks.
