Excerpt from the Hussman Funds' Weekly Market Comment (4/27/09):
After a sharp decline on Monday of last week, the market spent the remainder of the week recovering much of the loss. Overall, price/volume behavior continues to be uninspiring, leaving it still difficult to infer that investors have adopted a robust preference toward risk taking. The strongest characteristic of market action here is breadth (advances versus declines), but that also contributes to a variety of popular overbought indications, such as the number of stocks over their 50-day averages (which recently peaked above 80%, about where prior bull market rallies have tended to fail), and the McClellan oscillator and summation index, which are also fairly extended.
That's not to say that stocks have to decline here, but having failed so far to recruit much in the way of strong volume sponsorship, there is not much speculative merit to market risk, and only a modest amount of investment merit on the basis of valuations. Even if profit margins sustainably recover to above-average levels in the years ahead, stocks are priced to deliver probable total returns of about 10% annually over the coming decade. The idea that stocks are “once in a lifetime bargains” ignores the fact that this bear market began at strenuously overvalued levels on record profit margins – conditions that are not likely to return naturally in a deleveraging economy. Investors are taking the depth of the decline as a measure of the probable subsequent gain, but historically, the market doesn't work that way. There is little relation between the depth of a bear market and the strength of the subsequent bull.
For my part, I remain convinced that without serious efforts at foreclosure abatement (ideally via property appreciation rights), mortgage losses will begin to creep higher later this year, surging in mid-2010, remaining high through 2011, and peaking in early 2012. To believe that we are through with this crisis or the associated losses is to completely ignore the overhang of mortgage resets that still remain from the final years of the housing bubble.