John Hussman: Cautiously Pessimistic
John Hussman of www.hussmanfunds.com puts out a Weekly Market Comment (which I highly encourage you to read every week). Per usual, this is another good article. The sentiments are very similar to the ones I describe in Taking a Step Back: The Case for Staying Bearish for the Near Term - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=338359
John P. Hussman, Ph.D.
February 8, 2010
Three weeks ago, I noted that market conditions were "characterized by overvaluation, overbought conditions, overbullish sentiment, and upward pressures on yields - a situation that has historically been associated with a moderate continuation of upward stock market progress and a tendency to make successive but very marginal new highs, typically followed by abrupt and often severe market losses within a time window of about 10-12 weeks. As usual, that's not a forecast - just a regularity. But it's a harsh enough regularity to turn our knuckles white here, given the depressed and complacent level of the CBOE volatility index (VIX) and the little-observed upward pop in credit default spreads last week."
While the intervening three weeks have seen the market retrace most of its upside progress since last August, the decline is still somewhat shallow relative to previous instances when that "overvalued, overbought, overbullish, yields rising" conformation was cleared.
I'll also reiterate that blaming such a clearing event on a particular piece of news is not particularly useful. Once market conditions become as overstretched and complacent as they have become in recent weeks, a thousand events can act as triggers for abrupt weakness. Indeed, our main concern here - that of significant "second wave" credit losses - is not presently a significant part of the current focus of analyst conversation (where attention is centered on Greece and a few regulatory concerns). That's interesting, in the sense that we continue to expect those credit risks to become more salient as we move through the first quarter, and if that occurs, there may be a perception that the market is being hit by one thing after another. Credit spreads widened again last week, and we're keeping a keen eye on those, as well as indications of delinquencies and foreclosures, which may become a renewed source of concern.
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