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The Market's Dodging Boomerangs, Not Bullets

Tyler Durden's picture




 

Excerpted from John Hussman's Weekly Market Comment,

The current market environment joins the full range of ingredients that have characterized the most extreme market peaks – and preceded the deepest market plunges – in more than a century of history. On the basis of measures that are best correlated with actual subsequent market returns (and plenty of popular measures are not), we observe the richest market valuations in history with the exception of the 2000 peak. Even then, current levels on the best performing measures are only about 15-20% below the 2000 extreme. Current valuations now exceed those observed in 1901, 1929, 1937, 1972, 1987, and 2007. The 5-year market advance from the 2009 low, encouraged by yield-seeking speculation, now places the S&P 500 at more than double the level that we would associate with historically normal returns. Put another way, we presently estimate S&P 500 prospective nominal total returns of just 1.4% annually over the coming decade, with zero or negative average total returns out to roughly 2022. These valuations are coupled with extremely overbought conditions and the most lopsided bullish sentiment since 1987. Bearish sentiment is now down to 14.8% (Investor’s Intelligence), close to the low of 13.3% reached in September. Prior to this year, the last two times we’ve seen such lopsided sentiment were the April 2011 peak (just before a near-20% dive), and the October 2007 peak.

Of particular note, extreme overvalued, overbought, overbullish conditions – which we’ve observed sporadically for quite some time now – have more recently been accompanied by widening credit spreads and deterioration in broad market internals. We have entered an environment in which extraordinarily thin risk premiums have been joined in recent weeks by a subtle shift toward increasing risk aversion.

...

As Nigel Tufnel of Spinal Tap described the volume knobs on his guitar amplifier – “You're on ten here, all the way up, all the way up, all the way up, you're on ten on your guitar. Where can you go from there? Where? Eleven. Exactly. One louder. These go to eleven.”

The chart below presents a slightly different perspective than similar charts I’ve presented over time. Rather than showing discrete instances where a whole syndrome of overvalued, overbought, overbullish conditions has occurred (points with bullish sentiment at extremes, valuations historically rich, prices pushing upper Bollinger bands, etc), the vertical bars show a count of individual components, coupled with additional components that reflect deteriorating market internals. This gives a less binary view of these syndromes. The spikes (such as 1929, 1972, 1998, 2000, 2007, 2011, and the past year) show points when a preponderance of conditions – extreme valuation, lopsided bullish sentiment, overbought conditions, widening credit spreads, and at least some aspects of deteriorating market internals – have been observed in unison. The red line shows the S&P 500 Index (log scale).

The market has been dodging boomerangs, not bullets, and they are likely to come back harder for it.

Importantly, rich valuations here cannot be “justified” by appeals to current interest rates or profit margins unless that justification carries with it the assumption that both zero interest rate policy and cyclically-elevated profit margins will be sustained for decades, coupled with the assumption that economic growth will proceed at historically normal rates. Even 3-4 more years of zero-interest rate policy would only be “worth” a 12-16% increase in valuations over and above their historical norms. No, this is a market that is priced for utter perfection, reflecting the Potemkin Village that Fed-induced speculation has built on Wall Street, even as Main Street struggles in its shadow.

...

That’s really what quantitative easing has exploited: the willingness of investors to speculate, regardless of historically elevated valuations and extremely lopsided bullish sentiment, because of the discomfort that zero interest rates seem to offer “no other choice” but to take risk.

On that front, I clearly underestimated the willingness of investors to dispense with the lessons of history in recent years, responding to zero short-term interest rates by piling into a massive speculative carry trade. Again, from our standpoint, the proper response has not been to join in discarding those lessons, but to identify the criteria that distinguish where overextended extremes have had little near-term impact from periods when those extremes matter with a vengeance. That’s why we’re focused on market internals here – the recent deterioration suggests a subtle shift toward increasing risk aversion, despite depressed short-term interest rates.

 

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Mon, 11/17/2014 - 15:39 | 5458231 KnuckleDragger-X
KnuckleDragger-X's picture

Hope and change all the way down....

Mon, 11/17/2014 - 15:43 | 5458250 trade4cash
trade4cash's picture

Non-lethal wooden boomerangs or the beheading metal-bladed kind?

Now THAT would be an ISIS video.

Mon, 11/17/2014 - 15:43 | 5458251 gdiamond22
gdiamond22's picture

Another forecast for a top that never happens. Boomerangs, bullets, missiles, torpedos - the 'market' is dogding them all as that is what bull markets do. Asia is screwed, Japan is in a recession, Europe set for depression - where does all the money go? Its capital flows, not valuations, P/E or any other of that CFA/MBA bullshit you spent $100k on and cant make money.

Mon, 11/17/2014 - 15:49 | 5458269 Bell's 2 hearted
Bell's 2 hearted's picture

until we're in the next recession i agree with you

 

BUT

 

we're at the doorstep of next recession

 

the party in the market then will be OVER

Mon, 11/17/2014 - 16:50 | 5458481 venturen
venturen's picture

"Order up" 15 Quintillion of any currency printed ASAP and dumped to most crooked! It is sure to solve some problem that won't go away!

Mon, 11/17/2014 - 15:46 | 5458261 Bell's 2 hearted
Bell's 2 hearted's picture

historically, corporate profits 6% of GDP

 

currently, about 11%

 

look for reversion

 

or, uhh, it is different this time ...

Mon, 11/17/2014 - 21:52 | 5459699 Wild Theories
Wild Theories's picture

it's different this time

Mon, 11/17/2014 - 15:49 | 5458271 hungrydweller
hungrydweller's picture

There's those two words again, market and investor.  Neither actually exist today.  Just replace them with manipulated casino and gambler.  Now its fixed.

Mon, 11/17/2014 - 15:53 | 5458278 buzzsaw99
buzzsaw99's picture

advances in the face of deteriorating internals suggests nothing less than an intelligence that is purposely goosing the indexes higher on the cheap. that is to say the so called "market" is rigged. whether it goes up or down it does so because that is what the manipulators want. there is no market, there is only old yeller and she and her cabal set the price of everything.

Mon, 11/17/2014 - 15:52 | 5458279 Bell's 2 hearted
Bell's 2 hearted's picture

oh, and the thing with stock buybacks

 

shrinks the float ... which when profits go up makes EPS even higher ... BUT if profits turns to losses ... makes NEGATIVE EPS even higher (lower?)

Mon, 11/17/2014 - 16:28 | 5458372 ArtOfLife
ArtOfLife's picture

Looking at that graph, stocks are a great long term investement, some dips here and there, but always recovering. It would be even more impressive with dividends reinvested. 

Mon, 11/17/2014 - 16:57 | 5458520 Hongcha
Hongcha's picture

People just keep bringing these dire prognostications.  Some day they will be correct.

Mon, 11/17/2014 - 17:27 | 5458664 Eyeroller
Eyeroller's picture

Mad Max 2 The Road Warrior Boomerang Scene

http://www.youtube.com/watch?v=Co8vGjEz-xU

Needs to be a remake with:

Yellen as The Blonde Guy

Draghi as The Mohawk Guy

Obama as Mr. Fingertips

Reality/Math/Gravity  as the Aborigine Kid

Mon, 11/17/2014 - 17:31 | 5458675 sandhillexit
sandhillexit's picture

Has *anything* yet indicated a reversion in CorpProfits%GDP is on the cards?  Certainly not Citizens United.  Certainly not the Roberts court.  The structure of finance changed in 1999 and structure of government changed in 2009.  We have shot through the 1929 levels of CP%GDP and kept on going.  What force brings on this return to the long-term mean?   Teddie Roosevelt? 

All the small fry have been fished or all the small fish have been fried, so to speak.  

Hospitals joined BigPHarma in the ACA *negotiation.* This may be the new model for Washington DC. Net-neutrality, for instance, is corporate-vs-corporate interests lobbying.  But it's only the first of many.  Sometimes there will be one big winner and one big loser.  Mostly new monopoly powers will be written and the spolis shared out by formula.  Meantime, I love my MohuLeaf.  $39.99 for an antenna and HD is actually high-def.  Sports are BETTER. 

May the best organized delegation win.   (I think Calif is in trouble.) 

Mon, 11/17/2014 - 17:51 | 5458801 RabbitOne
RabbitOne's picture

We have all heard to no end “…With QE a sure thing from the FED we should buy every dip because it is different this time. …” And then I remember:  

 The four most dangerous words in investing are "This time it's different".

John Templeton

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