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More Blowoff than Breakout
By John P. Hussman, Ph.D.

* November 28, 2016

We continue to view the equity market as tracing out an extended two-year top formation, at what is presently the third most extreme level of market overvaluation in history. Enthusiasm about a runaway market “breakout” to the upside is clearly evident in fresh sentiment extremes, with advisory bullishness rising to 55.9% and bearishness down to 21.6% (Investors Intelligence), but the fact is that the S&P 500 Index closed Friday less than 4% above its May 2015 high, and just 1% above its August 2016 high. The broader NYSE Composite Index remains below the level it set in July 2014, though with a slightly positive return including dividends. The stock market has reestablished an extreme overvalued, overbought, overbullish syndrome of conditions that - unlike much of half-cycle advance from 2009 to mid-2014 - lacks internal uniformity, particularly among interest-sensitive and globally-sensitive sectors. For that reason, the recent marginal highs are more consistent with a “blowoff” than a “breakout.”

From a short-term perspective, it’s important to emphasize that if market internals were to become more uniformly favorable, we could infer a more robust shift toward risk-seeking among investors. That, in turn, could encourage a more neutral or constructive near-term view despite offensive valuations. As the data stand, however, the recent post-election advance appears much like the post-Brexit rally in global markets, where nearly all of the gains were compressed in the first 12 trading days, after which the enthusiasm flamed out.

Frankly, regardless of how market action plays out on a shorter horizon, I still expect the S&P 500 to surrender its entire total return since 2000 over the completion of the current market cycle. The interim returns are likely to represent little but temporary paper gains, except for investors who exit. Even in that event, some other investor would then be in the position of holding the bag. In aggregate, the U.S. equity market is unlikely to avoid a roughly $10 trillion paper loss by the completion of this market cycle. . .

http://hussmanfunds.com/wmc/wmc161128.htm

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