Market Direction and Stock Trends

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How to Wind Down a $4 Trillion Balance Sheet
By John P. Hussman, Ph.D. | June 19, 2017

. . .I’ll say this once again. Our Achilles Heel in the advancing portion of this cycle was straightforward: in prior market cycles across history, the emergence of extreme overvalued, overbought, overbullish syndromes had an urgency that preceded even the behavior of market internals. Quantitative easing disrupted that regularity. But even since 2009, the S&P 500 has lost value, on average, in periods that joined rich valuation, “overvalued, overbought, overbullish” syndromes, and deterioration in the uniformity of market internals. That’s the combination we currently observe, and our market outlook will shift as the evidence does.

Recall that the Fed eased persistently and aggressively throughout the 2000-2002 and 2007-2009 downturns. Once uniformly favorable market internals are lost and investor preferences shift toward risk aversion, monetary policy is not supportive of equities, because safe, liquid money market assets are seen as desirable assets rather than inferior ones. When market internals deteriorate following an extended period of wickedly overvalued, overbought, overbullish conditions, market collapses have typically followed, regardless of the response of the Federal Reserve. Investors should understand that lesson now. My impression is that they are going to need it.

http://hussmanfunds.com/wmc/wmc170619.htm

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