Hussman Weekly Market Comment

In short, we should be careful to make distinctions between what constitutes improvement, and what only constitutes a backing off from extreme risk aversion. Put bluntly, the economy is not improving, and it is not likely to improve within a few months, because we have far more defaults, foreclosures, and credit excesses to work through. It is simply not true that the stock market heads higher 6 months before the economy bottoms. That simplification was true of 1970 and 1975, but not much else. Rather, there is enormous variation, and about the only reliable tendency is that stocks are usually advancing strongly within about 3 months of a recession's end. That said, in the 2000-2002 plunge, the market didn't bottom until about a year after the recovery started.

It is wishful thinking to believe that the stock market is forecasting the economy here just because we've observed a sharp advance off of an oversold trough. Yes, the stock market will probably bottom before the economy does, but lacking any credible approach to foreclosure abatement, the economic pain could easily extend well into 2010. We are likely to see a very wide and extended trading range, more deep selloffs, more short squeezes, and eventually disillusionment and revulsion from investors.