Tags: Hussman | Stocks | Overbought | Cautious

Hussman: Stocks Overbought, Be Very Cautious Here

Wednesday, 21 March 2012 07:40 AM

Stocks as represented by the S&P 500 trade at the upper end of technical ranges and could easily decline, warns money manager John Hussman in a note to clients.

Stock prices by his firm’s measures do not necessarily warn of impending recession, but that isn’t enough reason to go heavy into equities now, Hussman maintains.

“I remain adamant that now would be one of the worst possible times to accept market risk in hopes of ‘catching up’ — when valuations are rich instead of reasonable, prices are strenuously overbought instead of oversold, investor sentiment is exuberant rather than fearful, the growing technical divergences are negative rather than positive, corporate insiders are frantically selling instead of buying, stocks are grasping at speculative highs instead of multi-year lows, and risk premiums are razor-thin instead of satisfactory,” Hussman writes.

Editor's Note: Wall Street Whistleblower Warns of Meltdown, See His Uncensored Interview

It would take nominal GDP growth of 6 percent and sustained profit margins to support decent stock returns, he maintains, calling the current market overvalued and overbought.

“The record of steeply negative market outcomes that have followed these conditions has nothing to do with my opinion but instead reflects objective historical evidence,” Hussman argues.

While Hussman is warning investors to steer clear of a potential train wreck, evidence is piling up that market timers are rarely successful over even a reasonably short time period, reports Barron’s.

Citing data from Standard & Poor’s, the investment weekly points out that 84 percent of actively managed funds failed to beat their benchmarks, the worst showing in a decade.

Over three years, the result was 57 percent and over five years 62 percent. Nor was there was any real premium for chosing asset classes typically considered outperformers — small and mid-cap funds.

If your fund did beat its index, be even more wary, Barron’s reports.

Managers in the top 25 percent of their category over five years rarely repeat that showing: Just 12.2 percent of large-caps, 3 percent of mid-caps, and 20.2 percent of small-cap funds in the most recent S&P review.

If the results were simply random, one would expect a repeat rate of 25 percent, Barron’s asserts. Essentially, managers did worse than flipping coins when it came to sustaining winning streaks.

Editor's Note: Wall Street Whistleblower Warns of Meltdown, See His Uncensored Interview

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