Industrial Insight

Extreme market conditions… | May 3, 2011

http://www.hussmanfunds.com/wmc/wmc110502.htm

May 2, 2011 Extreme Conditions and Typical Outcomes

John P. Hussman, Ph.D.

It’s clear that present conditions are among the most extreme in history. In fact, to capture instances other than today, 1987 and 2007, we have to broaden the criteria. The following are sufficient for purposes of discussion:

1) Overvalued: Shiller P/E over 18 (presently, the multiple is over 24)

2) Overbought: S&P 500 within 1% of its upper Bollinger band on a daily, weekly and monthly resolution (20 periods, upper band 2 standard deviations above the moving average), and S&P 500 at least 20% above its 52-week low.

3) Overbullish: Investors Intelligence bullish sentiment at least 45% and bearish sentiment less than 25% (presently, we have 54.3% bulls and 18.5% bears).

4) Rising yields: Yields on the 10-year Treasury and the Dow 30 Corporate Bond Average above their levels of 6 months earlier.

So not including the cluster of signals we’ve observed in recent months, we’ve seen 6 clusters of instances in post-war data (we’re taking the 1997, 1999 and 2000 cases as separate events since they were more than a few months apart). Four of them closely preceded the four worst market losses in post-war data, one was quickly followed by a 12% market decline, and one was a false signal over the short- and intermediate-term, yet the S&P 500 was still trading at a lower level 5 years later. The red bars indicate instances of this syndrome since 1970, plotted over the S&P 500 (log-scale).

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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.

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