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The Market's Unsustainable Bounce: Fast, Furious, & Prone-To-Failure
Submitted by John Hussman via Hussman Funds Weekly Market Comment,
“The Market Climate remains on a Crash Warning… but we have to allow for the possibility of the usual fast, furious bear market rallies that can occur after the market becomes oversold. In short, near term direction is a coin toss, but the next few days could involve a sizeable move one way or another. Overall, our position remains defensive, but we're managing our risks in a way that accommodates the possibility of a bounce. It's unfortunate, in my view, that investors have so much faith that a monetary easing can and will bail out the economy and the stock market. My view is fairly simple - the economic boom we've enjoyed has been driven by an inordinate amount of leverage, much of it of very poor credit quality, and by capital spending financed through the import of foreign savings. In an environment where demand for new capital investment was strong, easy bank credit and ample foreign savings fed extremely good economic growth rates. But I believe we are past that point here.”
Hussman Weekly Market Comment (link) December 19, 2000
“The market weakness we've observed since last year has been fairly tame in the sense that the S&P 500 has to-date suffered a fraction of the loss that we typically observe in a standard, run-of-the-mill bear. It can be dangerous to attempt trading bear market rallies early into a decline – especially when valuations remain rich. It's useful to remember that the 1929 and 1987 crashes started after the S&P 500 was already down about 14% from its highs. So emerging panic is not enough – there has to be some basis to believe that a positive shift in investor attitudes toward risk would be sustainable. Again, falling interest rates, moderate valuations, and very strong market action early into the rebound are useful in separating sustainable advances (even sustainable bear-market rallies) from the fast, furious, prone-to-failure variety. Presently, we don't even see emerging panic. What we do observe, however, is that prices are somewhat oversold on a very short-term basis, so it's reasonable to allow for one of those fast, furious bounces to clear that condition. Not a forecast – particularly because the prevailing Market Climate is unfavorable – but even high-risk markets can produce very strong short-term advances, and investors should not immediately abandon caution when they emerge.”
Hussman Weekly Market Comment (link) June 23, 2008
In recent weeks, I’ve expressed very pointed concerns about market risk, emphasizing that the most negative market return/risk profiles we identify are associated with a severely overvalued, overbought, overbullish syndrome of conditions that is then followed by a clear deterioration in market internals (across a broad range of individual stocks, industries, and security types such as low-quality debt).
At the same time, it's important to remember that, as in 2000 and 2008, even when we identify market conditions as extremely hostile, short-term action can be something of a coin flip. In some cases, the market can fall to a very oversold short-term low, and then the bottom completely falls out in a vertical decline (as we observed at numerous points during the 2000-2002 and 2007-2009 collapses). In other cases, short-term oversold conditions are “cleared” by what we’ve long called “fast, furious, prone-to-failure” advances. These generally feature lower trading volume than was observed during the preceding decline, with a concentration of buying activity on speculative and heavily-shorted names. That’s essentially how one characterizes a “short-squeeze” – frantic and somewhat price-insensitive efforts to chase a perceived reversal in beaten-down names, coupled with a backing-away of sellers. The result is a nearly vertical but low-volume advance.
As I noted last week, “Keep in mind that even terribly hostile market environments do not resolve into uninterrupted declines. Even the 1929 and 1987 crashes began with initial losses of 10-12% that were then punctuated by hard advances that recovered about half of those losses before failing again. The period surrounding the 2000 bubble peak included a series of 10% declines and recoveries. The 2007 top began with a plunge as market internals deteriorated materially (see Market Internals Go Negative) followed by a recovery to a marginal new high in October that failed to restore those internals. One also tends to see increasing day-to-day volatility, and a tendency for large moves to occur in sequence.”
My impression is that we are observing a similar dynamic at present. Though we remain open to the potential for market internals to improve convincingly enough to at least defer our immediate concerns about market risk, we should also be mindful of the sequence common to the 1929, 1972, 1987, 2000 and 2007 episodes:
1) an extreme syndrome of overvalued, overbought, overbullish conditions (rich valuations, lopsided bullish sentiment, uncorrected and overextended short-term action);
2) a subtle breakdown in market internals across a broad range of stocks, industries, and security types;
3) an initial “air-pocket” type selloff to an oversold short-term low;
4) a “fast, furious, prone-to-failure” short squeeze to clear the oversold condition;
5) a continued pairing of rich valuations and dispersion in market internals, resulting in a continuation to a crash or a prolonged bear market decline.
The panel of charts below shows the Dow Jones Industrial Average in those prior episodes, with the present episode at the lower right. The rounded green arrows identify the bull market peaks in DJIA (or in the 2014 chart, the highest level observed to-date), while the red arrows identify “fast, furious, prone-to-failure” advances that followed the market peak, generally after market internals had already deteriorated. The spikes marked the highest points that the DJIA would see over the remainder of those market cycles, on the way to far deeper bear market lows. The 2000 instance saw an extended period of churning between the January 2000 bull market high in the DJIA and later in the year. The 2000-2002 bear market ultimately asserted itself in earnest once our measures of market internals shifted decidedly negative on September 1, 2000 (see the October 2000 Hussman Investment Research & Insight). In the 2014 chart, the red arrow identifies the rally over the past several sessions.

What characterizes the instances below is not simply a decline from a market peak and a subsequent rally, but the sequence from historically extreme overvalued, overbought, overbullish conditions (see Exit Strategy) to a deterioration in market internals, an initial "air pocket" decline, and a subsequent short-squeeze that fails to restore market internals to a favorable condition. Of course, the prior episodes shown below are not themselves indicative of what will occur in the present instance, and current conditions might not be resolved in the same way. Still, investors should interpret recent market strength in its full context: we’ve observed a fast, furious advance to clear an oversold “air-pocket” decline – one that emerged from the pairing of rich valuations with a breakdown in market internals. Having cleared that oversold condition, we remain concerned that the pairing of rich valuations and still-injured market internals may reassert itself.
Given the “all eyes on the Fed” nature of the financial markets here, any predictable component to short-term returns here is likely to be overwhelmed by both random noise and knee-jerk responses to whatever language the Fed chooses in its statement this week. This makes us quite agnostic about near-term market behavior. The next several sessions could contain a significant further short-squeeze or a vertical collapse, and we have very little predictive basis for that distinction. Longer term, we continue to view present market conditions as among the most hostile in history, coupling rich valuations with market internals that remain unfavorable on historically reliable measures. So allow for any sort of action in the near term, but recognize that from a full-cycle perspective, we continue to view a 40-50% market loss as having very reasonable plausibility over the completion of this market cycle.
To reiterate what I wrote in June 2008, just before the market collapsed, “Again, falling interest rates, moderate valuations, and very strong market action early into the rebound are useful in separating sustainable advances (even sustainable bear-market rallies) from the fast, furious, prone-to-failure variety.” Those would still be among the primary considerations that would lead us to an optimistic or aggressive market outlook. As always, the strongest market return/risk profiles we identify are associated with a material retreat in valuations coupled with an early improvement in market action. We’ll take our evidence as it arrives.
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blah blah blah, dow 18k by dec., spx 2500...its santa claus rally time
And this 'market' is as real as santa claus
My 10 year old ; dad you're full of shit!
Me; what?!
My girl: none of my toys says made in North Pole!
Says China instead!
I'm not so sure, definitely not putting my money on it anyway.
Your losses are assured, unless you think the will actually go on FOREVER. If not, you have a 100% chance of getting caught in a bull trap, since you assume every dip is a buying opportunity.
At some point, it won't be.
Blood dripping down the walls and the house screaming "get out!" at you.... probably time to leave the Amityville Horror if you haven't already.
Maybe convert some paper gains into something a little more tangible. Like a new Corvette or some hookers & blow.
Ah, c'mon,... a fresh coat of paint, new drapes, some area rugs, a few throw pillows and this place will be as good as new...
Based on technicals the "market"certainly looks like a market that wants to roll over. However, as we have seen in the past, the not so invisible hand of the fed continues to prop this thing up. I believe that if anything major happens it will be within the next three weeks. If not, it's party on business as usual through year end. I took some short term profits Friday to have some trading firepower for later.
If the FED can somehow navigate the Class 5 rapids of ending QE and still resume pumping a market rally to infinity and beyond then yea magic has happened and its 'party on, business as usual' I guess.
That would be truly magical.
Don't be deluded, though. When the free money stops flowing and all you're left with is an economy where essentially NOBODY has picked up full time work since 2008, pay has gone down, companies have made no investments in R&D for years, we're in the beginnings of a slow-motion WWIII and the debt hasn't been dealt with... you're in plenty deep weeds.
My only question is how far they let things slide off the table before they reel them back in. I tend to think they'll be way behind the curve again. Doc thinks they'll be much more sensitive to it and react quickly. We'll see how it unfolds, but I don't think you need to pick up more dimes in front of this steamroller.
Like I said in the past, when they pull the carpet this thing is going down faster than a fat intern on a president and nobody will make substantial profits on the downside because there won't be anybody left to pay out. Having said that, there is still plenty of opportunity to make fiat as long as you're willing to lose everything that is currently in the market. It won't be for the faint hearted and you have to be nimble.
I would rather gamble in a casino.
Bear market rallies are easy to recognize. We've had the rollover, then the fall, the rest is a foregone conclusion.
Breaking:The dollar decline continues: China begins direct convertibility to Asia’s #1 financial center
the jawbone of a bulltard will force it higher
There's no such beast as "oversold" now and "reasonably priced" later...then "oversold" again...and again "priced correctly".
There IS an objective valuation for stocks, dependent on the holder's time-frame. And it might be S&P 500. THEN and only then will it no longer be "overbought" or "oversold"...but CORRECTLY-PRICED.
My theory, for what it’s worth:
Daily algos run underneath market action, handling VWAP, closing levels and bounces between moving averages in several time frames. In the weeks leading up to a potential ‘game-changer’, such as FOMC releases many players execute a game plan, overlaid atop standard algo chicanery, involving either hedges or directional bets, that take a week or so to build to avoid moving markets.
Given Yellen’s history, these temporary moves in the 7-10 market days in advance of FOMC have been to increase long exposure. Thus, we either get bizarre, WTF days like Friday’s silly, spiky candles or, when closer to the date, blatant upward manipulation that stalls any down move, like today. Also explains, as the bets are unwound, the predictable counter-Yellen action on post-FOMC days.
When you combine that with standard practice to squeeze new shorts after the first breach up to better re-shorting levels, especially if ‘big boys’ hold major inventory, or if hedgies with gunpowder lag terribly, you get crappy, hard to trade action like last week and today. Just a theory.
What makes these markets unsable is hedge funds wanting out. The dollar is exceptionally strong and the market at highs on some of the worst fundamentals.
Funds are also sitting on record gains, with certain hard assets at record lows and record high demand!
Who with any sense would not want out and into hard assets or cash of any sort?
The Fed must back stop selling, and the reason this will end badly is the fed will see it as their demise.
If you do not have an EU carry trade,or some other external destruction to support these markets it will implode.
The bubble hasn't popped. Just a correction. The real pop happens when interest rates rise, and asset prices collapse if all else is neutral. If money printing exceeds rising rates, well rates won't do much, assets will still rise.
Without the fed, both will happen. Everyone knows rates are artificially low, propping up asset prices. Even the market cheerleaders can't deny that. The situation is even worse in Europe
Talk about steadfast. John Hussman is the most steadfast economist I know. He sticks to his guns, which in his case, is his thorough analysis of economic history and metrics. I follow him. At times, I am certain he's gonna say "I've been wrong" but nope, he's certain. A very interesting man. I never miss his Sunday night missive.
"China on Monday announced direct trading between the renminbi and Singapore dollar beginning Tuesday, marking another step toward internationalizing the Chinese currency.
The announcement by China Foreign Exchange Trading System extended the yuan's list of direct onshore trade to more major currencies, including the U.S. dollar, the euro, British sterling, Japanese yen, Australian dollar, New Zealand dollar, Malaysian ringgit, and Russian ruble.
The move aims to boost bilateral trade and investment, facilitate the use of the two currencies in trade and investment settlement, and reduce exchange costs for market players, the foreign exchange trading system said in a statement.The move is also expected to help Singapore in its bid to become a renminbi offshore center.
According to the arrangement, China's interbank foreign exchange market will kick off direct trading between the yuan and the Singapore dollar via spot, forward, and swap contracts.With direct trading of their currencies, China and Singapore will be less dependent on the U.S. dollar to settle bilateral trade and investment deals."
Were Fucked and the master planners know it.
Unsustainablehttp://www.youtube.com/watch?v=KYHLar--tac
We'll know this bitch is about to blow when interest rates start, or are allowed, to rise.