Buying stocks as they decline to longer-term trends isn’t a reliable way to reap gains when the market is too expensive, says John Hussman, president of Hussman Investment Trust.

In other words, “buying the dip” may not work after a nine-day selloff ended on Friday for the longest losing streak since 1980. The S&P 500 stock index declined 5 percent from its August record, not enough to qualify as a 10 percent correction. 

"Short-term oversold conditions offer a sense of potential knee-jerk dip-buying behavior, but the conviction of that behavior is often fairly weak and short-lived,” he writes in a November 7 commentary. “Meanwhile, extreme valuations imply the likelihood of steep market losses.”

This month’s losing streak ended as the S&P 500 reached its 200-day moving average, a technical indicator of longer-term price trends. The stock benchmark rebounded with a 3 percent gain after investors anticipated Democratic presidential candidate Hillary Clinton would win the Nov. 8 election.

That 200-day moving average isn’t a reliable indicator of an ongoing bull market, Hussman says.

“The position of the S&P 500 relative to its 200-day moving average is not what defines favorable market action or our overall market return/risk classification,” he says. “We continue to classify the expected market return/risk profile as hard-negative. Valuations remain offensive, and market action continues to suggest increasing risk-aversion and an exhaustion of yield-seeking speculation.”

A 40 percent to 50 percent market decline is well within the realm of statistical possibility, he says.

“Historically, the most spectacular market losses typically emerge when overvalued, overbought, overbullish extremes are joined by increasing risk-aversion, as evidenced by breakdowns and dispersion across market internals,” he says.

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