This page has been archived and commenting is disabled.
This Time is Different....This is Not What You Think
The very erudite Dr. John Hussman is as good as a market researcher as there is, and he defines a set of market conditions that when they come together generally leads to poor equity performance. One of Hussman's syndromes is the "overbought, over-bullish, overvalued, and rising yields syndrome."
My own research would agree this assessment. The markets tend not to do well when yields are rising and when investor sentiment is overly bullish. These constructs have formed the basis of some of my most basic and robust trading models, and this combination of excessive investor bullishness and rising yields is at the core of my "Will Robinson" signal. Will Robinson was the young boy on the 1960's TV show, "Lost in Space", and when he was in danger, his robot friend would exclaim, "Danger, Will Robinson, danger!" So when I see this constellations of market findings, it is usually danger ahead for the equity markets.
So what does this have to do with the current market environment? From this perspective very little as I currently don't find these conditions in the current market environment. Over the past couple of weeks, bullish sentiment (and market "over -boughtness") has been unwinding slowly, and as my bond trading model is positive (i.e., lower yields), I am not expecting yield pressures to be a factor. Valuations, as measured by the Shiller 10 year P/E ratio or cyclical adjusted PE ratio, remains lofty, yet truth be told, valuations are a poor market timing tool anyways.
But while Hussman is "right" about the "overbought, over-bullish, overvalued, and rising yields syndrome" and market weakness, the opposite set of conditions is probably a market positive. The current market environment shows more bulls than bears (but not necessarily extreme) and falling yield pressures. Historically, this combination of factors has been associated with some of the more memorable price runs in recent market history. For example from March, 1995 to February, 1996 under similar conditions, the SP500 gained approximately 30%. There was a repeat from May, 1997 to May, 1998 when the SP500 gained 34%. This set of conditions were also seen at the 2003 market bottom, and the late 2006 through 2007 blow off market top. Needless to say, it does take bulls to make a bull market, and by the way, it does help to have falling interest rates. So maybe this is why investors are currently all lathered up.
But I would contend that you need to be careful for what you wish for as something has happened to the relationship between bonds and stocks over the past 2 years. In 2010 and 2011, falling bond yields have not been beneficial to equities. Rather, falling bond yields, as measured by bullish signals from our bond model, have been a sign of economic weakness, and have led to crushing (i.e., poor) returns in the equity markets. When bond yields were falling and when investors were more bullish than bearish, the SP500 had two draw downs exceeding nearly 15%. From the 1970's to the late 1990's it was rare (< 5% occurrence on 70 unique instances) for such market conditions to even have a draw down greater than 6%.
I suspect investors remember those good old days from the 1990's when the Federal Reserve had the luxury to put the pedal to the metal and keep rates low despite extreme investor enthusiasm and market overvaluations. They don't have that luxury now, and the only reason for the Fed to continue act in such a fashion is economic weakness. Our bond model is currently positive suggesting lower yields. While investors want to hark back to the "good old days", I don't think that is the correct interpretation. I believe this signal suggests economic weakness as it did in 2010 and 2011. This time is different as lower bond yields won't see a blast off in equity prices.
- advertisements -


The End. Or at least on that path.
What is this "market" you speak of in the article?
I haven't seen a market in a very very long time?
We have reached a Japanese-style bond brick wall. Interest rates can't / won't rise due to the massive increase in payments on the debt. Let's say rates rose to the historical 5%/ We're llooking at an extra $800B in annual deficits. So, we are locked in a bond straight jacket where the historic bond-stock relationship is being destroyed.
The driving force is NOT bond prices but uncertainty over FED and administration policies.
"Goat Rodeo - Appalachian slang for a chaotic, high-risk, or unmanageable scenario requiring countless things to go right in order to walk away unharmed."
I enjoy Hussman Weekly Comments...
"Very simply, I remain concerned about a blindside recession, significant market losses, and overconfidence in the ability of the Fed to create anything but temporary psychological lifts in the face of real structural economic problems."
BTFD!!!!!!!
http://www.hussmanfunds.com/weeklyMarketComment.html
It is indeed theatre that the FED is providing and their comical attempts to engineer a recovery is fated to end in tragedy. However this theatre is destined to continue for quite a while given two factors....the extreme complexity of the financial landscape and the continuous dumbing down of the populace through mindless entertainment, failing education systems and the everyday struggle which leaves little time to contemplate.
All the Central Banks a stage and all the fiat dollars merely actors upon it - to paraphrase mr shakyspear, and to quote from his great grandaughter several generations removed, the middle aged marvel, Britney Spears, "hit me baby one more time."
a desperate dance of dollars, marching across the globe singing the stars and stripes forever, falling on deaf ears.
We await the next move on a game board worn out, there are no moves left save the same old ones until the board breaks and the rules change and everything gets reshuffled.
Its duct tape and prayers at the FED every morning and tears and ink every night. Its hard work ruining a nation and it took the fed nearly 100 years to wipe out America.
a single electronic currency, that is the end game. Swipe your card in the feds butt crack. Get used to that smell, we're in the shit now boys.
Anyone really surprised? People do not want to hear the truth, it is too scary and therefore they believe false promises. Never take your eyes off the truth. The paper-pushers want to to continue to rob the system of wealth while adding nothing of real value, even if it means total chaos/collapse. Fine with me, let them hang themselves. The truth of the matter is that Nature makes no promises regarding your survival. Once you recognize that and realize that everyday is a gift, you can get back to honest work living a productive life with just compensation (in whatever form that may be). Long black markets, bribes, and corruption. Who is to say that these aren't the only free markets today.