Some cautious financial minds are predicting that right now might be a good time to sit out the stock market, despite the economic recovery. Are they right?
• the Standard & Poor's 500 trading at more than 8% above its 52-week exponential moving average
• the S&P 500 up more than 50% from its four-year low
• the 10-year Treasury yield higher than six months earlier
• the Investors Intelligence's bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears
WHEN ALL THOSE CONDITIONS OBTAIN, as they very nearly do now, look out below. In 1973, a 48% collapse ensued over 21 months, and in August 1987, there was a 34% plunge over the following three months. Since that ancient history, losses of 10% to 18% ensued in the 1998-2000 period, followed ultimately by a plunge of more than 50% in the dot-com bust of 2000-02. And in 2007, a correction of 10% culminated in the 50%-plus plunge of 2007-09 (see chart).
Forsyth pairs Hussman's words of caution with the even more cautious take from Walter Zimmerman, who's looking for a serious reversal and breakdown to come this week.
I don't know Zimmerman's track record of these types of prognostications but I know that Hussman is typically over-cautious (he hedged against the dotcom blowup 12 years ago but then also sat out the bull market of the last three years).