Tuesday, July 30, 2013

Hussman - 40% Crash Likely (Maybe worse)

“The danger of mispricing risk is that there is no way out without investors taking losses. And the longer the process continues, the bigger those losses could be. That's why the Fed should start tapering this summer before financial market distortions become even more damaging.” - Martin Feldstein, President emeritus, National Bureau of Economic Research, July 1, 2013

“… I don't expect this cycle to be completed with a 20% loss, or a 25% loss, but instead a loss in the 40-55% range…A 40% market loss is the central expectation. Even run-of-the-mill bear markets average a loss of about 32%, while run-of-the-mill cyclical bear markets in a secular bear context average a loss closer to 38%...”

“…we have one of the most overvalued, overbought, overbullish equity markets in history, but one where investors are under the illusion that stocks are appropriately priced, because they are being sold a valuation benchmark (forward operating earnings) that reflects profit margins 70% above historical norms – a direct result of unsustainably large deficits in combined government and household savings.”
– John Hussman, PhD, Hussman Weekly Commentary for 29 July 2013.  Read the commentary and analysis at Hussman Funds at…

Of course John Hussman has been warning of this potential for more than a year. Now he is being joined by the “Elliott Wavers” who are calling for a top as soon as August.  I can’t say too much because the NTSM system has been negative on the markets since March, and the market is up almost about 7% since then.

“Despite consumer confidence at a six-year high, the latest AP survey of the real America shows a stunning four out of five U.S. adults struggle with joblessness, are near poverty, or rely on welfare for at least parts of their lives amid signs of deteriorating economic security and an elusive American dream. Hardship is particularly on the rise among whites…” Story at

I know ZeroHedge tends to report the negative news, but the above is a stunning statistic reported by the AP.  This story was also prominent on the MSN Home Page Monday in the AM, but MSN misquoted the statistics in its headline (claiming 80% of the population was on welfare) and I couldn’t find the article anywhere on MSN Monday afternoon.

QUESTION: If US income nationwide has fallen 5% in the last 5-years and the rest of the world is in trouble too, how can the economy avoid recession?  The short answer is…only if a lot of people get hired.  See below chart:
Tuesday, the S&P 500 was up 1pt to 1686 (rounded). 

VIX was unchanged at 13.59. 

The 10-day moving average of stocks advancing on the NYSE bumped up to 51%.  Usually a value below 50% signals additional trouble for the markets.

There were 114-new-highs today (Monday) an improvement over the previous day, but 6-days ago there were over 300-new-highs.  Market internals are still trending down so internals suggests further down for the S&P 500.

Tuesday, the overall NTSM analysis was HOLD at the close. 

Sentiment was 70%-bulls at the close Monday and the 5-dMA of percent-bulls was 66% at Monday’s close (based on Guggenheim/Rydex funds I track).  Both of those numbers are extremely bullish and that is a negative for the market.  The topping process continues!

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!) 

I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.