Excerpt from the Hussman Funds' Weekly Market Comment (4/13/09):
As veteran market observer Richard Russell noted following a tribute Saturday evening, “one question that was asked repeatedly was ‘What is the difference between investors' sentiment now and that which existed at the 1974 bottom?' My answer was that there is a lot of complacency today. In fact, many leading analysts are already saying that ‘this is a new bull market.' … At the 1974 bottom, the sentiment was the opposite -- people and funds were black-bearish. Nobody talked about ‘the danger of missing this advance.' In fact, when I turned bullish in late-1974 I received hate-letters and angry notes saying that ‘Russell, you have lost your mind,' and ‘Russell, why don't you hang it up and find a business that you're fitted for.' I mean people were furious that I had turned bullish, pretty much the opposite of sentiment today. Actually, I'm surprised to see how quickly analysts and investors are willing to turn bullish today.”
That's not to rule out the possibility that the final low of the bear market is behind us (though I doubt it). What I do see as unlikely is a “V” bottom where stocks will now proceed to durably recover their losses without (at least) a very difficult and extended sideways period that take stocks back to levels that compete with the prior lows. Historically, advances of the size we've observed have only “stuck” when the major indices had already advanced past their 200-day moving averages by the time stocks were about 20% off the lows.
There's a reason for that. During a true bottoming process, favorable market internals are typically “recruited” even as the market is moving down or sideways. Investors work through the ebb-and-flow of information through repeated cycles of enthusiasm and disappointment. To expect the disappointments to quickly come to an end and to be replaced by clarity is to expect something that is not characteristic of historical experience.
Very simply, new bull markets are generally not widely heralded, and investors should be awfully suspicious when there is a consensus that “the bottom is in.” As I noted back in December, in Recognition, Fear and Revulsion (before the market took a plunge to fresh lows over the next two months):
“That cycle of decline, followed by hope, followed by fresh losses, is really what ultimately puts a final low in place. The final decline of a bear market tends to be based on “revulsion” – a growing impatience among investors who conclude that stocks are simply bad investments, that the economy will continue to languish, and that nothing will work to help it recover. Revulsion is not based so much on fear or panic, but instead on despair and disillusionment. In a very real sense, investors abandon stocks at the end of a bear market because stocks have repeatedly proved themselves to be unreliable and disappointing.”