acting-man.com / Pater Tenebrarum / September 21, 2016
John Hussman on Recent Developments
We always look forward to John Hussman’s weekly missive on the markets. Some people say that he is a “permabear”, but we don’t think that is a fair characterization. He is rightly wary of the stock market’s historically extremely high valuation and the loose monetary policy driving the surge in asset prices.
The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but strengthened noticeably thereafter. The a/d line is just one of many examples. A major reason for this was that market participants reassessed the likely future path of the Fed’s monetary policy – click to enlarge.
As he reminds his readers in this week’s market comment, he altered his short term outlook on the stock market when the improvement in market internals shown in the chart above asserted itself after the February 2016 low. Not only the a/d line, but a whole host of market internals improved. The advance after the February low was broad-based and the trend in internals went counter to the negative technical evidence that had accumulated earlier.
This does of course not change the probability that the market will deliver very poor long term returns based on current valuations. This week Hussman warns that several of the trend-following components of market internals he focuses on have begun to deteriorate. We don’t know which combination of indicators precisely he is looking at, but a number of internals have indeed begun to diverge negatively from prices lately.