This Time is Different, Yet with the Same Ending 

John P. Hussman, Ph.D.

I’m not saying a market crash is imminent, but it is a risk because very reliable valuation methods (that have remained reliable even in the recurring bubbles since the late-1990’s) presently estimate negative prospective nominal total returns for the S&P 500 on every horizon of 7 years or less, and an annual total return of about 1.9% over the coming decade. On the other hand, these same methods projected negative 10-year prospective returns – even on optimistic assumptions – at the 2000 peak (see the August 2000 Hussman Investment Research & Insight). While those projections turned out to be perfectly accurate (indeed, the 10-year total return of the S&P 500 was still negative even after the index had nearly doubled from its 2009 low), it also means that the overvaluation of the S&P 500 Index in 2000 was even greater than it is today. As I’ve noted before, the median S&P 500 component is more overvalued today than in 2000, and the average component is similarly overvalued. It’s only the capitalization-weighted valuation that was higher in 2000, primarily because of eye-popping valuations of large technology companies.

In any event, it’s fair to say that valuations could go higher still, and we can’t rule that out. Historically, the emergence of similarly extreme overvalued, overbought, overbullish syndromes (as we also observed in 1929, 1972, 1987, 2000 and 2007) would suggest that the possibility is negligible – but we’ve been punished for our knowledge of history in this cycle. Overvalued, overbought, overbullish syndromes have now been extended without consequence for a much longer period than at any prior speculative extreme. Once you’ve seen a single flying pig, you’re forced to conclude that it’s at least possible for a pig to fly – even if you’re fairly sure it’s only been shot out of cannon.

Those constructive opportunities will emerge soon enough, even if valuations never return to “normal” levels. As I’ve noted frequently, the strongest estimated market return/risk profiles are associated with at least a moderate retreat in valuations coupled with an early improvement in measures of market internals. We don’t rule out a retreat to historically undervalued levels at some near or distant point in the future, but very constructive investment opportunities in the interim would not require the market to retreat anywhere near historical valuation norms (which are presently more than 50% below current market levels). Meanwhile, we expect that the completion of the present cycle will be a welcome reminder that patient, informed discipline is as vital as ever.

DYI Comments: The Great Wait Continues....Once again for the true value players this wait will be a "blink of an eye" for the bearish speculator the wait will be equivalent to "eternity!"  For those who can handle the volatility a small short position of 5% to 10% would be warranted.  Eventually "the cat will be out of the bag" sentiment will change to bearish and no matter how much money the Feds throw at the market it will decline.  How much of a drop?  It would not surprise me in the magnitude of 45% to 60%.  However Professor Hussman has stated that due to ultra low interest rates 30% to 40% decline is more probable which is more than enough to justify a short position such as the Prudent Bear Fund.

Everything you need to know about investors in one chart

Josh here – If you knew nothing else about your fellow investors at all – nothing – but committed this concept to your consciousness and built a strategy to exploit it, you would attain a spot amongst the top half of all investors in the country within a single generation. You’d be better than average with only this single bit of information at your disposal. I know this for a fact because I’ve seen the dollar-weighted returns tables going back decades.

DYI Comments:  When everyone is bullish you are reducing your exposure to stocks; when they are bearish you are increasing your percentage to equities.  Old Josh is "spot on" doing just that would put you into the top half (possibly higher) of money managers.  Excellent chart worth the look.

DYI