John Hussman: The Stock Market has Never Been this (Intermediate-Term) Overbought

Excerpt from the Hussman Funds' Weekly Market Comment (10/19/09):

In reviewing the status of the market late last week, the condition of the data was something of an anomaly in that regard. On the valuation front, stocks are presently overvalued, but to levels that we've observed at least several times in history. The anomaly relates to market action, where we can no longer find a single historical instance where stocks were more overbought on the combination of short- and intermediate-term measures we respond to most strongly. Indeed, only one instance comes close, which is November 28, 1980.

Now, if that date doesn't ring a bell, I have to admit that it didn't resonate with me either at first. On that date, the stock market was just a few months into a fresh economic recovery following the 1980 recession, employment conditions were just beginning to improve, capacity utilization was picking up, the Purchasing Managers Index had just moved back over 50, and stocks were certainly not overvalued on the basis of normalized earnings or cash flows. Indeed, the P/E multiple of the S&P 500 was just over 9, on the basis of both trailing and normalized earnings. Advisory sentiment was not strenuously bullish either, so there was little to identify it as a date to remember.

As it happened, however, November 28, 1980 was the peak of the furious advance in S&P 500 driven by enthusiasm over "less bad" economic news, though with little proven economic strength. It was the last day of the 1980 bull market. The economy later proved to have been in a short lull within a double-dip recession, taking stocks to their final lows in 1982.

One of the notable features of extreme overbought conditions is that investors rarely have much opportunity to get out, just like the fast and furious advances that clear oversold conditions tend to occur too quickly to capture unless one has already established a position. As for the present, we have rarely seen 90% of stocks suspended above their 50- and 200-day moving averages for as sustained a period as we have now observed. While I try to avoid forecasts, I would be less than forthright if I didn't admit that I am concerned that the current overbought condition may be cleared somewhat violently.

Comments

[logicalthought:]

Let me first state that I'm fundamentally extremely bearish. Okay, having said that, let me now point out some data in the vein of "the market staying irrational longer than you or I can remain solvent":

Friday's S&P 500 close was approximately 5% above its 50-day EMA of 1036. But on 6/1 (intra-day) it got 8.7% above it, on 7/23 it got 7.5% above it, on 8/7 it got 8.3% above it, on 9/23 it got 7.1% above it, etc.

Now, here are the interesting "irrational longer than you or I can remain solvent" parallels: On the day of the March lows, the S&P (intra-day) hit 18% BELOW its 50-day EMA, at the November lows it got almost 25% below it, and during last October's lows it got 29% (!!!) below it.

So, for anyone who thinks this rise has been parabolic, well, if for every reaction there can be an equal and opposite RE-action...

Oct 19 06:27 AM

[phdinsuntan...:]

Good job, please can you show the same data in some hard currency, thanks. For me is a stock related problem now:

US stocking oil and empty houses,
banks stocking cash and shorting currencies,
China stocking metals, coal and manufactured production,
IEA cheerleading Gulf profits,
poor families stocking anger and paying debts,
interest rates up? chaos.
Easier solution: there is not any.
but if there is any gut:

1. Governments out of commodity business.
2. Global bank ban of any non banking business (save/loans).
3. Bassel II for investment banking corporations.

In the shor time: long some DUG, and willing to stock more of it.
Please try to commit with some position to let us know your ideas stand for something that may cost you.

Oct 19 08:22 AM

[oldman:]

ok, but I have trendines, if broken, I get out.

Oct 19 09:18 AM

[jse17:]

I appreciate Dr. John’s work that presents in an insightful, intellectual mode. Supporting the overbought scenario, mutual fund cash was reported at 4.0% down from its recent 02/2009 high of 5.9%. The recent low of 3.5% was recorded in 07/2007, a happier point in time. These figures are reported with a 2-month lag by the Investment Company Institute’s bulletin.

With all of the technicals noted and assumed material in character, what do we do? Barton Biggs has stated that it takes courage to be a pig! Baron Von Rothschild proclaimed that his wealth resulted from taking the middle 2-quarters of a market’s move and forfeiting the first and fourth quarter’s profits. It is abundantly safe to say that conflicting clichés, truisms, formulas theories, and tenets abound.

A prudent investor may well respond that it is impossible to know with any degree of absolute certainty precisely what to do. If so, perhaps it is best to take some of our highly valued chips off the table e.g., 10%, sit back and open a bottle of our favorite libation, and enjoy the day!

Oct 19 11:48 AM

[The Economi...:]

Too bad HFT wasn't around in 1980. Market's are being stretched to extreme ends in either directions. Wait until the reversal happens.

Oct 19 02:37 PM

[GordonG:]

Deseret News, The (Salt Lake City, UT) - June 12, 1994

NEWSLETTER SAYS STOCKS ARE A BEAR

Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, Mich. 48331), which The Hulbert Financial Digest has called ``the most promising newcomer among investment newsletters'' after its first three-year performance doubled the market's return, has turned bearish on stocks. ``The market is beginning to display the classic traits generally associated with bull-market tops. The time to buy stocks is in the middle of a recession, not when an expansion...

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A Coupla Bears Tell Why They're Still Growling
Pay-Per-View - Los Angeles Times - ProQuest Archiver - Mar 3, 1995
It's not the end of civilization, Hussman says: "Stocks are just due for a natural, normal, run-of-the-mill bear market." ...

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Analyst unimpressed by Pyxis rival
Pay-Per-View - San Diego Union - Tribune - ProQuest Archiver - Jul 30, 1995
John P. Hussman of the Michigan-based newsletter Hussman Econometrics is not bullish on the stock market now,

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BusinessWeek: May 15, 1995
Adds John P. Hussman, a money manager and investment newsletter writer based in Farmington Hills, Mich.: "There's a likelihood of slipping into a bear market at any time."

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S&P'S 500 DIVIDEND YIELD IS 2.66%, LOWEST OF CENTURY
$2.95 - Deseret News - NewsBank - Jun 18, 1995
``The stock market has left itself no room for error,'' observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, MI 48331). ...

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May 5, 1996

STOCKS OFFER LOW-RISK PREMIUM, PAPER SAYS
The latest argument for higher stock prices is that Baby Boomers are saving more and investing it in stocks, notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334). ``In fact, there's been no evidence of any significant increase in the U.S. savings rate. The money-flow argument ignores the fact that every buyer's dollar that enters the market leaves it moments later with a seller. Stocks currently offer the lowest risk-premium in...

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Published on March 26, 1996, The Washington Times{PUBLICATION2}

Market's total value points to bad times

There have been five times this century when the size of the stock market (total capitalization) relative to the size of the economy (nominal gross domestic product) exceeded 75 percent, as it does today, observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, Mich. 48331)

"Each instance coincided with a Standard & Poor's 500 dividend yield of only 3 percent or less, as is also the case now. Each marked the peak of a major bull market

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Mr. Bear and Mr. Bull
By Mark Hulbert, 02.10.97
Forbes

The bear is John Hussman, editor of Hussman Econometrics, and adjunct professor of economics at the University of Michigan. What sets Hussman apart from the other bears isn't his focus on the market's fundamental extreme overvaluation. That's something he shares with virtually every other bear. What makes Hussman's bearishness noteworthy is his compelling explanation of the mistakes he made several years ago when he and the others turned prematurely bearish. ;

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Published on July 1, 1997, The Washington Times{PUBLICATION2}

Sky-high prices may warn of stocks' fall

Historically, when the price-earnings ratio on the Standard & Poor's 500 has been above 20-to-1, as it has been recently, it has always been because earnings are depressed, observes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).

"This is the first time in history that we've seen a P/E over 20-to-1 on record earnings. The only two times the P/E exceeded even 19-to-1 on record earnings was in 1964 and 1972. In

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Published on June 3, 1997, The Washington Times{PUBLICATION2}

As dividend yields sink, how far can stocks rise?

"The extremely high returns on stocks over the past 14 years have been the result of a decline from the highest dividend yield in two generations, 6.7 percent in August 1982, to the lowest dividend yield in history, now well below 2 percent," notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).

"It seems unlikely that the dividend yield can fall much from current levels. So it seems equally unlikely that stocks can rise

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Nov 7, 1997

Stocks have never been this highly valued when earnings were at record levels, notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, ...

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Economist: U.S. might already be in recession

The San Diego Union - Tribune - San Diego, Calif.
Author: DON BAUDER
Date: Oct 30, 1998

He's John P. Hussman of Sunrise, Fla.-based Hussman Econometric Advisors, and he says the markets are already giving off clear recessionary signals: The interest rate spread between corporate debt and Treasury debt has widened, indicating growing fear of credit risk, while the spread between long- and short-term Treasury instrument interest rates has narrowed considerably, suggesting the market expects a very sharp growth slowdown.

Combine these so-called "forward-looking" indicators with other similar ones, such as the stock market decline, the drop in consumer confidence and the National Association of Purchasing Managers Index suggesting that manufacturing is contracting, and "the signal says, `Hey, we're expecting very slow growth, probably recession,'" Hussman says.

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Oct 20 08:22 AM

[Richard H. ...:]

Dr. Hussman,

I am Richard Serlin. I had you for an international finance course in the University of Michigan MBA program in 1997. Thank you for an excellent teaching job.

Perhaps stocks are going to do poorly in the intermediate term, but on your website you write, "For now, my impression is that stocks are not priced to deliver satisfactory long-term returns..."

Robert Shiller's site has the November 2009 P/E 10 at 18.91 which is not bad by historical standards, and that's with earnings unusually depressed by the severe recession. So, why do you think in spite of this that the long term return does not look satisfactory?

Nov 12 01:39 AM