A good post from John Hussman at Seeking Alpha. He thinks we are on the verge of a sharp and overdue correcttion:
In the microscopic focus on day-to-day fluctuations in the market, it is easy to overlook how unusual — specifically, unusually unfavorable — current market conditions are from a long-term historical perspective. The S&P 500 is currently at 18 times record net earnings (never mind that these earnings are also on record profit margins, so that the market is also implicitly pricing in permanently high expectations for these margins — on normalized margins the P/E would be above 25). Bond yields are rising. Price trends remain strenuously overbought. The Investor’s Intelligence figures put advisory bulls at 53.3%, with bears at an unusually low 18.9%.
If we look historically at points where similar conditions held true, we find April 1965 (swiftly followed by a market plunge), December 1972 (the beginning of the ’73-74 decline which took stock prices down by half), August 1987 (no comment), July 1999, December 1999, March 2000 (all three of the latter followed by separate drops of 9-16%), and a few instances closely surrounding those dates.
It’s notable that while we have not observed even a 10% correction since 2003, the corrections that we have observed also had their origins in (somewhat milder) combinations of overbought conditions, high bullishness, and rising yields (either Treasury bond yields or Treasury bill yields)…
It’s also important to recognize how strenuously overextended international markets are at present. This can only exaggerate the impact of any shift in the preference of investors away from risk. With valuations rich, stock markets almost universally overbought, bullishness extremely high, and mutual cash levels the lowest on record, it seems very much like everybody is in because they expect everybody to get in, not knowing that everybody is already in…
The question is whether the speculators holding stocks here (unhedged) will encounter others willing to lift those stocks from their hands at higher prices, and what happens if they don’t.
While I am generally in accord with Hussman’s views, note that other surveys find a much higher level of bearish sentiment.
