“Get used to this kind of volatility,” warns Hussman Funds’ John Hussman in his latest comment.
“Unfortunately, the moment interest rates hit zero, [historical risk and valuation] limits vanished, and preemptively responding to speculative extremes became terrifically detrimental.”
“Presently, neither valuations nor internals are favorable, and that is what opens up a trap door under the market.”
Goldman agrees, high valuations in isolation do not provide much of a timing signal for investors but, again, when combined with other factors can indicate risks of a correction or possible bear market.
Goldman aggregated these variables in a signal indicator, and took each variable and calculated its percentile relative to its history since 1948. What it found is that, heuristically, the odds of a bear market at this moment, are in the 73% percentile.
The aggregate Bear Market Risk Indicator shows the average of these factors. Historically, when the Indicator rises above 60% it is a good signal to investors to turn cautious, or at the very least recognise that a correction followed by a rally is more likely to be followed by a bear market than when these indicators are low. By the same token, when the Indicator is very low, below 40% (as was the case in 1975, 1982 and 2009), investors should see any market weakness as an opportunity to buy.
As shown below, the risk of a bear market has almost never been greater.
So where are we now? As Oppenheimer puts it simple, “The signal is red.”
While the momo-driven indices have bounced back honorably (fadin Friday), the world’s largest stock index (NYSE’s @24 trillion market cap Composite Index) has bounced and failed at key technical support…