Tags: Hussman | S&P | trough | bull

Hussman: S&P Headed For a Trough

Monday, 06 Aug 2012 02:29 PM

Economist and fund manager John Hussman estimates the prospective return/risk ratio of the Standard & Poor’s 500 Index to be in the most negative 0.6 percent of all historical observations.

“Moderate losses may be a necessary feature of risk taking, but deep losses are erasers,” Hussman writes in a note to investors. “A typical bear market erases over half of the preceding bull-market advance.”

Hussman notes that many investors forget how strongly the bull market erasing the bull-market gains affects full-cycle returns, particularly during late-stage bull markets.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

“The most obvious example, of course, is the 2008-09 decline, which erased not only the entire total return of the S&P 500 since its 2002 low, but also erased the entire total return of the S&P 500 in excess of Treasury bill yields (its ‘excess return’) going all the way back to June 1995 –making all of the benefit from risk taking during the late-1990s completely for naught,” he says.

Similarly, Hussman continues, the 2000-02 bear market wiped out the excess return investors had gained in the S&P 500 since February 1996, and the 1990 bear market erased the excess return of the S&P 500 all the way back to January 1987.

“When prevailing market conditions are associated with a sharply negative expected return/risk ratio, as they are at present, and either trend-following measures are negative or several hostile indicator syndromes are in place (what we call Aunt Minnies), we will typically be fully-hedged and will raise the strike prices of our put options toward the level of the market, in order to defend against steep market losses and indiscriminate selling,” he explains.

Similarly, John Mauldin, founder of Millennium Wave Investments, says the 12-year-old bear stock market has about five more years – and another recession – to run.

The 100 percent-plus rebound of the S&P 500 from its March 2009 lows doesn’t signify an end to the down cycle, as such corrections are normal for a bear market, he tells Yahoo.

After those corrections come more declines. "It generally takes three events to really make us negative about something, to wipe us out," Mauldin says. We’ve already had two with the recessions of 2001 and 2007-09, he says.

“One more, and we’ll probably get a statistical bottom. Then we can see the beginning of a comfortable period to put our toes back in water.”

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans


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2012-29-06
Monday, 06 Aug 2012 02:29 PM
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