Market Extremes

I wish to highlight 2 important points.

The first one is to stand behind one of the great market analysts of our times, Dr John Hussman. Yes it’s true his reputation has been smashed by his poor performance the last few years. On this I am not able to defend him as much as I would like as I think the processes he adds to his portfolio construction on top of his macro analysis leave little to be desired. I actually don’t even want to go there, rather I want to stand by his rigorous market climate and valuation approach.

These are the key points and like John I am prepared to fall on my sword and face the ridicule.

Meanwhile, the S&P 500 is more than double its historical valuation norms onreliable measures (with about 90% correlation with actual subsequent 10-year market returns), sentiment is lopsided, and we observe dispersion across market internals, along with widening credit spreads. These and similar considerations present a coherent pattern that has been informative in market cycles across a century of history – including the period since 2009. None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk.”

Where he refers to a 90% correlation with actual subsequent returns this refers to his valuation model forecaster. If you go through the math you will see how the model works, but you are safe in the assumption that over the long term this model is pretty darn accurate. See below an example of how it looks.

I end my first point with Hussman’s words highlighting how overvalued we currently are, “The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, is 115% above reliable historical norms and only 15% below the 2000 extreme. Unless QE will persist forever, even 3-4 more years of zero short-term interest rates don’t “justify” more than a 12-16% elevation above historical norms.”

My second point is to just highlight an extreme in market momentum we haven’t seen in its history, I am not sure what to draw from it right now but I wanted to document it as I believe it will be significant when we look back over the fullness of time. For 29 days the S&P500 closed above its 5 day moving average, the previous record of 27 days took place in 1928.

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