John Hussman: Green Shoots and a Grain of Salt

Excerpt from the Hussman Funds' Weekly Market Comment (6/29/09):

The key fact is that we have significant economic headwinds before us, and we should be careful to take our green shoots with a grain of salt. No piece of economic news, even a strong employment figure here or there, is likely to flip the switch that makes the problems all go away. It would be one thing if stock valuations were at a level that deeply discounted significant and ongoing negative news, but on the basis of normalized earnings, the S&P 500 is actually slightly overvalued here, and is likely to deliver long-term returns over the coming decade of only about 7.8% annually. An economy that is prone to disappointments, coupled with a market that requires a lack of them, is not a good combination.

Similarly, we are skeptical about things that cross our desks urging us to forget the economy's debt fundamentals and break into a chorus of Zippidee-Doo-Dah. Last week, for example, I was treated to a report on the so-called “Golden Cross” – the event where the 50-day moving average of the S&P 500 crosses above the 200-day moving average. Next to a carefully compiled set of dates were the purported returns of the S&P 500 over the following 1, 3, and 12 months. As one moves down the report, the analyst either figured that investors would no longer pay attention or forgot how to operate a calculator, so one-year gains of 100%, 200% and more were piled into the average (the figures were about 10 times the true returns).

While it's generally true that bull markets are largely spent above the 200-day moving average, it doesn't actually follow that taking 50-day / 200-day crossings as discrete buy and sell signals is unusually profitable, lacking other methods to get you out near the peaks or to avoid whipsaws. Suffice it to say that the true record of those "Golden Cross" signals is bronze at best, with actual 1, 3 and 12 month total returns in the S&P 500 (since 1940) coming in at 1%, 3% and 14% on average. Even those figures, however, benefit from three particular instances where the S&P 500 gained over 40% over the following year – those instances were 1942, 1953, and 1982 – each which began at multiples of just 7-8 times normalized earnings (not the current multiple of nearly double that). Excluding those three instances, the subsequent returns from the Golden Cross are no better than throwing dice.

In short, beware of analysts bearing indicators that all is suddenly well, and check their facts.

Comments

[Larry House:]

Thanks, John. Useful and insightful as always.

Jun 29 01:30 PM

[Gary Griswold:]

John,

There is lots of skepticism in here, but not much substance. You have expressed you position, but not really defended it.

Jun 29 01:34 PM

[thiazole:]

"Suffice it to say that the true record of those "Golden Cross" signals is bronze at best, with actual 1, 3 and 12 month total returns in the S&P 500 (since 1940) coming in at 1%, 3% and 14%"

If you only use the times it occured during or at the end of a recession, I believe you will get much better results. In fact, I think you'd be hard pressed to even find many examples where the market performed worse than the "average" returns you quoted under these parameters.

I also think the market performs better after the "Golden Cross" during secular bear markets like the one we are in (simply because it crashes so much deeper so the rate of recovery is much more rapid).

Jun 29 03:20 PM

[Victor84:]

I would like to know if this author has revised his original stance of the market testing the 450-550 range, shattering the March lows along the way. While I respect this author and it is prudent to display caution, his own fund seems to have been caught flatfooted by the uptrend of the markets. According to this article, the market is slightly overvalued right now; does this mean that if we dip below say 850, this represents a buying opportunity? Maybe the government actually did something right and avert a Depression?

Jun 29 03:28 PM

[untrusting ...:]

If you want to know Hussman's views, just go to his website. He posts a weeky update, so it is pretty easy to follow what his positions are. He clearly posts his asset and allocation postions and further indicates that he is substantially hedged as well. You would be hard pressed to find a more thoughtful and knowledgable investment manager than Hussman.


On Jun 29 03:28 PM Victor84 wrote:

> I would like to know if this author has revised his original stance
> of the market testing the 450-550 range, shattering the March lows
> along the way. While I respect this author and it is prudent to display
> caution, his own fund seems to have been caught flatfooted by the
> uptrend of the markets. According to this article, the market is
> slightly overvalued right now; does this mean that if we dip below
> say 850, this represents a buying opportunity? Maybe the government
> actually did something right and avert a Depression?

Jun 30 12:46 AM

[Alphameister:]

"In short, beware of analysts bearing indicators that all is suddenly well, and check their facts."

Beware also analysts who attack straw men ("all is suddenly well") and who find a reason to throw out data that are least supportive of their conclusions. While your rationale for throwing out those three crosses is not unreasonable, I'll note that two of those three crosses occurred during years in which the inflation rate was more than 6%, including 1942 when inflation ran almost 11%. I'd hope you would acknowledge a relationship between high inflation and low price-earnings multiples.

Kudos to Thiazole for a comment that rings true to me (I haven't crunched the numbers either). I would also add that investors seeking golden crosses accompanied by earnings multiples in the 4 to 8 range for companies generating superior growth would be well advised to investigate small-caps in the Chinese market.

Jun 30 11:23 AM

[Old Trader:]

Victor,

A characteristic of an absolute return strategy is that it will lag in a strong bull market enviroment because of the hedges that are an intrinsic part of such a strategy. A roughly 40% rise 3+ months would qualify as a "strong bull market enviroment". The plus side of that strategy, is when TSHTF and the market goes into a death spiral, one is only down a bit, flat, or up a tad.


On Jun 29 03:28 PM Victor84 wrote:

> I would like to know if this author has revised his original stance
> of the market testing the 450-550 range, shattering the March lows
> along the way. While I respect this author and it is prudent to display
> caution, his own fund seems to have been caught flatfooted by the
> uptrend of the markets. According to this article, the market is
> slightly overvalued right now; does this mean that if we dip below
> say 850, this represents a buying opportunity? Maybe the government
> actually did something right and avert a Depression?

Jul 01 03:01 AM