"Major market peaks, even those like 2000 and 2007 that were followed by 50% losses, have never felt dangerous at the time." John P. Hussman Ph.D.

Setting the Record Straight 
John P. Hussman, Ph.D.

With advisory sentiment running at 56% bulls and fewer than 20% bears, with most historically reliable valuation metrics about twice their pre-bubble norms (and presently associated with negative expected S&P 500 nominal total returns on every horizon of 7 years and less), with capitalization-weighted indices near record highs but smaller stocks and speculative momentum stocks diverging badly, and with a Federal Reserve clearly intent on winding down the policy of quantitative easing that has brought these distortions about, we continue to view the present market environment as among the most dangerous instances in history. 

Over the years, we’ve repeatedly emphasized that the very best investment opportunities are associated with a significant retreat in valuations that is then coupled with early improvement in market internals across a broad range of stocks, industries, and security types. Conversely, the very worst market outcomes are associated with overvalued, overbought, overbullish conditions that are then coupled with divergences in market internals and a loss of uniformity (as we observe today). As I wrote in October 2000, “when the market loses that uniformity, valuations often matter suddenly and with a vengeance. This is a lesson best learned before a crash rather than after one.” 

Make no mistake, reliable valuation measures for the median stock are actually more extreme today than in 2000. On a capitalization-weighted basis, valuations are beyond every pre-bubble point in history except for a few months in 1929. In the bubble that ended in 2000, final valuations were higher owing to the extremes in large-capitalization technology stocks at that peak. Many observers seem to believe that valuations are of no concern unless they match that singular extreme. Good luck on that. The novelty, imagination, and extrapolation born of the late-1990’s internet and technology revolution is unlikely to be matched by an economy that can’t post growth beyond the threshold between expansion and recession despite the largest monetary intervention in history. The Fed is already retreating from that intervention, and for good reason, because while the Fed's extraordinary actions are not actually linked to real economic outcomes, they encourage very risky speculative side-effects.

DYI Comments:  Once again the Federal Reserve has blown another bubble along with the central banks of England, Central Europe (EU), China, and to a lesser extent Japan.  This will end badly for those holding stocks on a world wide basis along with yield seeker's [Junk Bonds].  Here in the U.S. we will be lucky if this 2nd half down cycle is ONLY 40% to 50% decline.  However, DYI is forecasting a 45% to 60% market smash relating to the extreme over valuation of the market.

If the speculative juices push this market far higher and faster than sales, earning, and dividends can justify them DYI will have to move our sentiment indicator for stocks back to Max Optimism creating a DOUBLE SECULAR TOP!  Will this happen??  Who knows?  So far with the divergences as noted by John Hussman this will not be the case.  As with markets they can and do fool us in the short term; so anything can happen.

Market Sentiment

Smart Money buys aggressively!
Capitulation
Despondency--Short Term Bonds
Max-Pessimism *Market Bottoms*MMF
Depression
Hope
Relief *Market returns to Mean* 

Smart Money buys the Dips!
Optimism
Media Attention--Gold
Enthusiasm

Smart Money - Sells the Rallies!
Thrill
Greed
Delusional---Long Term Bonds
Max-Optimism *Market Tops*--REITs
Denial of Problem--U.S. Stocks
Anxiety
Fear
Desperation

Smart Money Buys Aggressively!
Capitulation

THE GREAT WAIT CONTINUES.....For the long term investors as opposed to the short term trader this waiting game in the grand design is nothing more than a "blink of an eye!"  The speculator who is a bear, the wait for will be more than they can handle and throw in the towel by going long at the top.

Long term returns for any asset is NOT BAKED INTO THE CAKE but is a function of price. Over pay returns will be dismal over pay significantly then losses will be baked into the cake mathematically.

Estimated 10yr return on Stocks

Using 5.4% as the historical growth rate of dividends and 4.0% as the ending yield.

Starting Yield*---------return**
1.0%-----------------------(-5.7%)
1.5%-----------------------(-1.7%) 
2.0%------------------------1.3%---YOU ARE HERE!
2.5%------------------------3.8%

3.0%------------------------5.9%
3.5%------------------------7.8%
4.0%------------------------9.4%
4.5%-----------------------10.9%

5.0%-----------------------12.3%
5.5%-----------------------13.6%
6.0%-----------------------14.8%
6.5%-----------------------15.9%

7.0%-----------------------17.0%
7.5%-----------------------18.0%
8.0%-----------------------19.0%

*Starting dividend yield of the S&P500-**10yr estimated average annual rate of return.

For monies invested in stocks today and held for the next ten years here is our estimated average annual return.  Please note this return is BEFORE Fees, inflation, and taxes.  This will reduce the returns by 1% to 2% (possibly more) for the average investor using mutual funds.  This is why DYI advocates when ever possible the use of low cost index funds such as Vanguard.

DYI
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John Bogle: The “Train Wreck” Awaiting American Retirement

DYI Comment:  A top notch article from FRONTLINE it is well worth the read.  There are so many smoking gun paragraphs it would be impossible to post all of them without getting into copy write problems. A great read.

Also here is a link to the PBS documentary called "The Retirement Gamble."

DYI