Hussman Weekly Market Comment: Low-Water Mark

As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we’ve observed in a century of data. There is no way to view this as something other than a warning, but it’s also a warning that I don’t want to overstate. This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5% of the data for months. This is just the most negative return/risk estimate we've seen. It is what it is.

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Despite the uniformity of negative signals we presently observe, I can’t say with certainty that this particular instance will produce negative market outcomes, or that we won’t find ourselves at odds with a speculative, richly valued, overbought, overbullish but still-advancing market. But even setting aside our particular methods, we have a very mature market advance, at a high Shiller P/E, atop nearly every upper Bollinger band (two standard deviations above the 20-period average at daily, weekly, and monthly resolutions), in an environment of lopsided bullishness. All of this should make bells go off for anyone familiar with market history. Of all the investment adages that are being embraced as reasons to accept market risk, somehow the phrase “buy low, sell high” is conspicuously absent. I expect that this will prove to be a crucial error for investors. In all of the present ebullience about quantitative easing with no ex-ante amount (which I’ll again point out is far different than “unlimited” QE), the market conditions we observe at present have been consistently associated with negative outcomes throughout history.