Posted by: stockscooter | September 18, 2012

Prepare for the Worst, Hope for the Best

Here is an article quoting John Hussman, a very trustworthy analyst and money manager.  Afterward, I have a chart of the S&P 500 with a few comments of my own. 


Hussman:  Stock Market Risk/Reward Worst in 100 Years

Tuesday, 18 Sep 2012 07:53 AM

By Dan Weil

The return/risk profile of the Standard & Poor’s 500 Index has dropped to its lowest point of the last 100 years, according to mutual fund manager John Hussman.That certainly points to an overvalued, over-bullish market, he writes in his weekly commentary.“All of this should make bells go off for anyone familiar with market history. Of all the investment adages that are being embraced as reasons to accept market risk, somehow the phrase ‘buy low, sell high’ is conspicuously absent.”And that will almost certainly mean trouble for investors, Hussman says.“In all of the present ebullience about quantitative easing with no ex-ante amount, . . . the market conditions we observe at present have been consistently associated with negative outcomes throughout history.”

To be sure, nothing new has happened, Hussman says.

“This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5 percent of the data for months.”

One could argue that the Federal Reserve’s massive easing campaign is simply blowing a bubble in risk assets that will burst with grave consequences for the financial system.

And investors are embracing risk to attain income.

“The search for yield . . . may grow more intense,” Rebecca Patterson, chief investment officer of Bessemer Trust, tells The Wall Street Journal.

Read more on Hussman: Stock Market’s Risk/Reward Profile Worst in 100 Years

This Elliott Wave interpretation supports Hussman’s belief of an imminent correction.  I question whether or not the market can hold on until after the election.  It’s in bad shape in this humble analyst’s view.  2007 is the top of the market. The financial problems started there ending in 2009 in wave 1 of the new bear market.  Everything since has been a correction upwards. I have this correction labeled ABC.  This ABC has a 5-3-5 wave structure, known as a zig zag correction, which are often noted in wave 2’s.  I don’t believe new highs will be seen.  Wave 2’s often make the investor feel comfortable that a new bull market has begun and times are better.  Fundamental problems are often worse than at the previous peak (2007).  Do you believe financial matters have gotten better?  John Hussman doesn’t.

My contention, for some time now, has been that we may see something that has never happened before–Deflation with rising interest rates.  The deflation stems from the continued credit contraction and derivatives melt-down.  Rising rates will not come form rising food costs through the commodity markets as some suspect. But it will come from the downgrading of the U.S. Treasury Bond.  We’ve already seen if fall from AAA to AA by the S&P rating agency, over a year ago.  Finances are worse for the U.S. today then back then.  Election year politics have prevented another downgrade.  But mark my words, another one is coming. Our national deficit has grown larger than our annual GDP!  The downgrade in credit worthiness will push rates up as buyers of our debt will demand higher returns for the increased risk.  No one is talking about this, yet it seems obvious to this analyst.

This next chart has added indicators.  The bottom frame with the black circle has a light blue oscillator peaking.  However, when it peaks simultaneously with the green trend line, AND the green trend line is lifting upward in the overbought area, this indicates a massive upside blow-off top.  Again, these are monthly charts, ergo the top may come over the next 6-8 weeks, prior to the election.   Also of note, the last C wave is finishing it’s last 5th wave.  According to Elliott wave theory, 1484 is the top of the preferred count for this entire correction since March 2009.

Maybe the powers-that-be will wave a magic wand and make everything better.  If not, I believe we should prepare for the worst and hope for the best.


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