The Fed's Unprecedented Assist

 |  Includes: SPY
by: Roger Nusbaum

It has been a while since we mentioned John Hussman and his weekly commentary but he had a particularly interesting quote this week;

Emphatically, I am not encouraging investors to deviate at all from their own investment discipline, provided that it is well-defined, well-tested, and matches their risk tolerance over the complete market cycle. But investors who have no such discipline – who believe that it is possible to simply “hold stocks until they turn down” or “party until the Fed takes away the punch bowl” – these investors are likely to be confounded by the failure of these simplistic notions to provide the comfortable exit they unanimously envision. Today is not 2003, and it is not 2009.

This came after a paragraph or two defending his permabear reputation. In many past posts I have talked about taking bits of process from various sources to create your own process and Hussman has had an influence on my approach in terms of investing for the cycle or longer and sticking to a portfolio discipline that you have a reasonable basis to expect will work.

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I diverge from him markedly on when and how to hedge and navigate the market's cycle. The chart compares Hussman Strategic Growth in blue, the Hussman Strategic Return in green and the S&P 500 in orange for the last year. The S&P 500 is not really the proper benchmark but it does create some context for what has gone on in the world and these two funds, both of which can and do own stocks. A little over a year ago Hussman Strategic Advisors launched the Hussman Strategic Dividend Value Fund (MUTF:HSDVX), which according to Google Finance is up 2.4% in the last year and had 69% cash as of its last (but undisclosed on Google) reporting date.

If you are familiar with Hussman you know he understands markets, cycles and economics. In the last few years the market is up a lot but it has done so with some amount of aid from unprecedented Fed policy, which should raise doubts about the underlying health of the economy.

In my opinion the way to reconcile this is to hold off on extreme defensive action (69% cash, if accurate, is extreme) until there is more of a sign that the market is rolling over or otherwise headed downward. For us that has to do with the S&P 500 breaching its 200-DMA but there are several different ways that offer a reasonable, not infallible, basis for warning the market is headed lower.