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Sometimes They Do Ring The Bell At The Top
Submitted by Jim Quinn via The Burning Platform blog,
I’m starting to get the feeling the scorn and ridicule heaped upon Dr. Hussman by the Wall Street shysters is about to be thrown back in their faces. Of course, he isn’t an I told you so type of person. He’s an analytical investor who bases his thinking upon historical facts and valuation methods that have proven accurate over the last 100 years of investing. His two key principles on investing are flashing red. Corporate revenues and profits are falling. The attitude of investors regarding risk is shifting from greed to fear. With valuations at record highs, margin debt at epic levels, and professional investors extremely bullish, even the hint of fear will begin the collapse. It’s already happened twice in the last fifteen years and Hussman called the previous two collapses too.
If I were to choose anything that investors should memorize – that will serve them well over a lifetime of investing – it would be the following two principles:
1) Valuations control long-term returns. The higher the price you pay today for each dollar you expect to receive in the future, the lower the long-term return you should expect from your investment. Don’t take current earnings at face value, because profit margins are not permanent. Historically, the most reliable indicators of market valuation are driven by revenues, not earnings.
2) Risk-seeking and risk-aversion control returns over shorter portions of the market cycle. The difference between an overvalued market that becomes more overvalued, and an overvalued market that crashes, has little to do with the level of valuation and everything to do with the attitude of investors toward risk. When investors are risk-seeking, they are rarely selective about it. Historically, the most reliable way to measure risk attitudes is by the uniformity or divergence of price movements across a wide range of securities.
I should make the point that these principles aren’t new. They capture the same principles I laid out in October 2000, at the beginning of a market collapse that would take the S&P 500 down by half and the Nasdaq 100 down by 83%. They capture the same principles that prompted me to turn constructive in April 2003 after that collapse. They capture the same principles I laid out in July 2007, just before the global financial crisis took the S&P 500 down by 55%.
For those who are visually astute, please peruse the chart below. The conclusion is quite simple. When the current conditions have existed over the last 45 years, the stock market crashes. Period.
The chart below imposes one additional condition, showing periods where fewer than 60% of S&P 500 stocks were above their respective 200-day moving averages. This is as clear and simple as the Iron Laws can get. The worst market outcomes in history have always emerged after an overvalued, overbought, overbullish advance has been joined by deterioration in market internals.
Let’s go one step further, and restrict these instances to weeks where the S&P 500 had just set a record weekly closing high. That restriction kicks out 1987. In that instance, the earliest warnings were from weakness in utilities and corporate bonds, but the percentage of stocks above their own 200-day averages didn’t fall below 60% until the market itself was already down nearly 10% from its high; less than two weeks before the crash. Many trend-followers were caught off-guard because the warning period was so brief. If one wasn’t following a broad range of market internals, one needed to respond almost immediately to the emerging weakness in order to avoid the collapse.
The market has fallen for five consecutive days. The Chinese market is already crashing. I wonder how many people are prepared to see their investment portfolio or 401k fall by 50% – again. We’re gonna find out.
The remaining signals (record high on a weekly closing basis, fewer than 27% bears, Shiller P/E greater than 18, fewer than 60% of S&P 500 stocks above their 200-day average), are shown below. What’s interesting about these warnings is how closely they identified the precise market peak of each cycle. Internal divergences have to be fairly extensive for the S&P 500 to register a fresh overvalued, overbullish new high with more than 40% of its component stocks already falling – it’s evidently a rare indication of a last hurrah. The 1972 warning occurred on November 17, 1972, only 7 weeks and less than 4% from the final high before the market lost half its value. The 2000 warning occurred the week of March 24, 2000, marking the exact weekly high of that bull run. The 2007 instance spanned two consecutive weekly closing highs: October 5 and October 12. The final daily high of the S&P 500 was October 9 – right in between. The most recent warning was the week ended July 17, 2015.
Though advisory sentiment figures aren’t available prior to the mid-1960’s, imputed data suggest that additional instances likely include the two consecutive weeks of August 19, 1929 and August 26, 1929. We can infer unfavorable market internals in that instance because we know that cumulative NYSE breadth was declining for months before the 1929 high. The week of the exact market peak would also be included except that stocks closed down that week after registering a final high on September 3, 1929. Another likely instance, based on imputed sentiment data, is the week of November 10, 1961, which was immediately followed by a market swoon into June 1962.
They do ring a bell at the top. The bell is ringing loud and clear. The bell is ringing so hard, it broke. Anyone not heeding the warnings of Dr. Hussman will end up being much poorer. This will not end well.
It’s often said that they don’t ring a bell at the top, and that’s true in many cycles. But it’s interesting that the same “ding” has been heard at the most extreme peaks among them.
Look at the data, and you’ll realize that our present concerns are not hyperbole or exaggeration. We simply have not observed the market conditions we observe today except in a handful of instances in market history, and they have typically ended quite badly (see When You Look Back on This Moment in History and All Their Eggs in Janet’s Basket for a more extended discussion of current conditions). In my view, this is one of the most important moments in a generation to examine all of your risk exposures, the extent to which you believe historical evidence is informative, your tolerance for loss, your comfort or discomfort with missing out on potential rallies even in a wickedly overvalued market, and your true investment horizon. It’s perfectly fine to decide, after that consideration, to maintain a bullish outlook. Earnest people can disagree, and that’s what makes markets. But do review all of your risk exposures here.
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Think Pavlov's dogs.
Q2 GDP up .7%
Think living through the Carter years
Billy Beer?
https://en.wikipedia.org/wiki/Billy_Beer
The liberty bell cracked the first time it was struck...
If that is not a tell, I don't know what is....
... "If I were to choose anything that investors should memorize – that will serve them well over a lifetime of investing – it would be the following two principles:"
1. buy low
2. sell high
Get it on, Bang the gong, Get it on..
https://www.youtube.com/watch?v=TVEhDrJzM8E
It sure as hell wont be the Liberty Bell the sheeple hear ringing after the shit hits the fan this time. This bell is going to be more like a tyranny and oppression bell. Or maybe the dinner bell at the FEMA detainment and re-education camp.
And for the Proles:
Save first, spend later.
https://en.wikipedia.org/wiki/Business_Plot
UBER is the bell. When they go public....
SHORT THE PHONE BOOK!
The crack in the bell proves it was bad from the beginning.
Stocks exploding. Thanks for the buy signal, again ;)
well duh. the fat cow is going to send stocks higher tomorrow at 2pm, so you need to buy today.
(before theyactually crushes the bulls "this time is different" dreams and talks about the sept hike)
Hey.....Did the Bell Ring............
It crackled...
Market Reality has a way of being like a recurring case of Herpes. It's reappearance is always signaled by intense discomfort.
0 interest rates have people buying homes they do not need.
Bah! Baloney....At times like these...Its a time for Superman...or in this...the Super Central Bankers!
Relax everybody. Where is all the money going to go, into Treasuries? Yeah, right. All those billionaries are going to enjoy making 1%.
What's 1% of a Billion $? 10 Million! After taxes...ok...9 Million (you did know they don't pay more than that in taxes!)...So you really think these guys are happy to living off 9 million a year? You can't even buy a rusting yacht for that!
This is all a short term breather...for the big rise! There is always a hyperbolic rise before a crash, check history! If history is your thing.
And we haven't had anything close to hyperbolic yet!
"There is always a hyperbolic rise before a crash, check history! If history is your thing."
Look at those last two crashes in the charts, how are those "hyperbolic" compared to now?
Those two charts, sir, a closer to linear than anything else. I know what linear, parabolic and hyperbolic are, do you?
Now here is what hyperbolic means....
http://www.thebubblebubble.com/tulip-mania/
THAT IS HYPERBOLIC!
Doesn't change the fact that it DIDN'T happen the last two crashes, despite your assertion that it always happens.
I also have a math degree, numbnuts.
So what stupid, I'm a physicist. Doesn't mean nothing. Any idiot can see the difference if you can't, i suggest you didn't learn much.
here take a look at the DOW:
http://www.paradigmbook.com/assets/DowHistory1920to1931.jpg
These are not linear and not parabolic, they are hyperbolic.
Banding about what education credentials doesn't mean anything now-a-days. Most universities teach rubbish. To many people have degrees and don't know anything about what they learnt. A sure fire way of telling that something is an educational idiot, is that they have to say they are a mathematician. Well Mr. Mathematician, you don't know what your talking about. Universities are pumping out to many morons...and you are one of them, i_call_you_my_base.
FACTS NOT FLUBBING WORTHLESS DEGREES!
Now I can just imagine all the mathematicians are going to come out now have to defend the honour of one of their colleagues. Its always the same! I can see it coming.... lets see.
As an Empiricist, I tend to think that Physicists, & Mathematicians, are completely lacking in pissing skills. Frankly, this pissing contest is over, and there is no clear winner.
Zoom out on the timeline for this chart and you will see that the hyperbolic curve began in 1974.
Good catch there DD1 --
Indeed, it took about 3 years for the reality of the situation to take hold - and then, off to the races...
Four tons of beer, bitchez
I think the scale is logarithmic?
what is brown and sounds like a bell?
What's yellow and tastes like pee?
Bear Whiz Beer. That why it's yellow.
-Firesign Theatre
DUNG!!!
This has become a POLITICAL cycle - not an investment cycle. Reason for 2000 and 2008 downs was a change of party. Go short and pray the R's win.
Just BTFD assholes!!
"Markets" levitating for no good reason whatsoever.....total fucking BULLSHIT!
Historical facts and valuation methods?!
That's so 20th century and not intended for use in ANY casino!!
what has changed is that the Friedmanite world has given total latitude to both CBs, as to their owners the TBTF, to print and lend cheap.
We drown in papal fiat called reserve (no more devil's gold to question it)...and that is papal indulgence; it gets you to intemporal heaven. Ring the bell all ya bretheren !
So if the FED is Pope and the TBTF its cardinals who elect him, who can doubt that God WILLS IT ?
The fiat pump that doesn't stop giving Indulgences (passports to heaven) to those who buy it and Hell to those who can't afford to !
The embarrassing thing is the ratio : 1% go to heaven, 99% go to hell.
What a church ! It has no efficiency. No wonder the barbarians are at the gate!
The FED rings the bell and Bullard is awakened to come out and declare that "All is well"!!
Hussman either intentionally left out, or simply did not wish to corrolate the effects of extreme central bank intervention into the recent historical data, or the historical record period. Not sure why. He must have an opinioin on the matter, no? It is not as if what has never taken place before in fiscal/monetary/economic history since 2008 is of no significance...
He did put it in to his newsletter, Jim Quinn just didn't reproduce that section:
"The methods also captured another regularity: in previous market cycles across history, the emergence of an extreme syndrome of overvalued, overbought, overbullish conditions was usually accompanied or closely followed by a breakdown in market internals. That encouraged us to immediately take a hard-defensive outlook when those syndromes emerged. If the Federal Reserve's policy of quantitative easing made one thing “different” in the recent half-cycle, it was to reduce that overlap, by intentionally encouraging continued yield-seeking speculation regardless of overvalued, overbought, overbullish extremes."
It was the single issue that resulted in what Hussman called his "stumble" in 2009.
Be that as it may, what Hussman points to as his second principle has at its heart the unpredictability of human actions, "the attitude of investors towards risk". This is nowhere visible on the charts and is the reason why some peaks go on to higher peaks and others go on to crash. The article and newsletter only echo what a large number of people have been writing for 8 years (or 15 years or 30 years or 75 years or 300 years ... depends on your timeline of investing).
All Hussman is saying is "This time ain't different".
I believe that is correct - Fed or no damn Fed. This ahem market is an overvalued SOB, and history is gonna rhyme real hard soon now. I'm gonna call before Christmas, 2015, and get myself some more dry powder.
this time is different. never before in the history of the markets have we had zero interest rate policies with many countries having negative interest rates and massive coordinated QE. you can't chart this because it hasn't happened before. you could be sure that many of the steps china has done out in the open has happened in US and europen markets in the past 6 years but under cover. you could be sure that when they get really desperate they will steal deposits like they did in Cyprus and will do in Greece soon.
they will do whatever it takes to keep things propped. there are no rules now and they know they can get away with it. this will last a long time IMO. the "black swan" event is the only thing that stops it. then, the crash will be sharp and violant (aka 1987).
anyone venture a guess as to what it will be?
the bell rang to indicate bottom was in, and it is safe to buy this dip. Yellen said so, that is why she will raise the rates
"...There is a story of a Bell in a Monastery which, when any of the house was sicke to death, rung alwaies voluntarily, and they knew the inevitablenesse of the danger by that. It rung once, when no man was sick; but the next day one of the house, fell from the steeple, and died, and the Bell held the reputation of a Prophet still..."
- John Donne, from Meditation 16, 1624
"No man is an island, entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend's or of thine own were: any man's death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bells tolls; it tolls for thee."
- John Donne, from Meditation 17
"Shattered goal fills his soul with a ruthless cry
Stranger now, are his eyes, to this mystery
He hears the silence so loud
Crack of dawn, all is gone except the will to be
Now they see what will be, blinded eyes to see
For whom the bell tolls
Time marches on
For whom the bell tolls"
- Metallica, For whom the Bell tolls, 1984
It is a serious situation. Maybe the Chinese government should buy US stocks and the US government should buy Chinese stocks.
Wow, nice and concise
You do realize that "Ringing a bell at the top" is only a metaphor for the signal that Ali Baba gave to the other 40 thieves to begin loading the plunder on the camels.
Sometimes it sounds just like a bell:
Ans sometimes the bell at the top is nothing more than a stockbroker jumping out of his 14th floor office window onto a Sabrett's hog dog cart below.
As I have told you all innumerable times, I too, have heard the "top bell" ring.
It was in the Spring of 2000 when the whole world wondered, "what shall be the end of NASDAQ's rise"? I was in the kitchen watching the tea kettle boil while it's lid flapped up and down. An apple hit me on the head. And a half dozen cockroaches formed the numerals: 5000.
A week or two later NASDAQ hit 5000 and I sold everything with both hands
Don't expect to hear Grossglockner when the market opens the day you should sell. The bell at the top could easily be a venereal sore on your johnson that looks like Carl Icahn smiling.