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John Hussman: Unlikely the Bottom Is In

As usual John Hussman's weekly commentary for this week is well worth the read. He's convinced we're not even close to completing a bottoming process and-I'm starting to sound like a broken record-continues to pound the table with the idea that debt restructuring must occur and corporate bondholders cannot be continued to be bailed out by the taxpayer. Some excerpts:

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.

As Russell noted, “When the tide reverses and turns bullish, there are usually many phenomena that appear. It is usual to see some sort of non-confirmation in the Averages (we saw that at the 1974 bottom). It is usual to see Lowry's Selling Pressure decline substantially prior to the actual bottom (Lowry's Selling Pressure declined very reluctantly prior to the March 9 low, and this alone makes me suspicious). Normally, once the tide reverses the stock market starts up carefully in a slow persistent plodding rise.”

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.”....

....In short, I would be more impressed with market action here if we were observing stronger trading volume with an established core of improved market internals. A good retest in the major averages, coupled with quiet strengthening of market internals, would be more characteristic of a durable “bottoming process.” My opinion (which we don't invest on and neither should you) is that we're not even close to completing a bottoming process. Frankly, we can't rule out that the final low is in place either. So as usual, we'll evaluate the evidence as it emerges.....

....Until we observe large-scale restructuring of mortgage debt and the debt obligations of major financial institutions, we will be applying trillion dollar band-aids while the underlying cancer metastasizes. The longer we wait to restructure debt, to swap debt for equity, and to expect those who made the loans bear the losses as well, the more we risk allowing this downturn to become uncontrollable and unfathomably costly to the public.