Quote from Specterx:
The thing is that Hussman's timeframe is quite long - years to a decade, not weeks or a couple of months.
For instance his recent bearish warning (based on valuations and price action) was something to the effect that current conditions have, on average, resulted in a 25% peak-to-trough market decline at some point over the 18 months following the signal. I suspect he regards a couple of months or quarters of 'positive surprises' as just noise, and while such a vague forecast has significant implications for buy-and-hold investors, it's almost meaningless for traders relying heavily on short-term momentum and technicals.
Incidentally, S&P 500 earnings apparently fell in the fourth quarter. Under $24 a share operating earnings versus over $25 in the third. This is consistent with my impression that, except for a few high-flyers like AAPL, it's been a rather tepid earnings season.
Note in this connection that rising earnings do not necessarily imply rising prices, see the 1973-74 bear market. Moreover, forward operating earnings estimates and forward PEs appear to be worthless as market-timing devices, or indeed for any purpose other than Wall Street marketing materials. Every single year, analysts play a game whereby they forecast strong earnings for the following year - lots of growth, and implying low forward PEs - only to steadily reduce the estimates as the year goes on. Estimated EPS for 1Q2012 fell from $26.50 last July to $23.86 currently.
Going by operating earnings with no lookback or smoothing, the 2Q07 PE was only 15.5 - 4Q11 was 14.18. But stocks were the "cheapest they've been since 2000" right before a 50% market plunge. Operating earnings PE in the last half of 2002 (end of the first bear market) were between 18.5 and 19 - were stocks a poorer investment then than at present? OTOH Shiller PE shows that stocks have been badly overvalued ever since the late 90s but at least, by this measure, they're cheaper now than in 2007 and 2009 briefly approached fair value.
Forecasts based on valuation do not in any event imply anything whatever about near-term market direction: e.g. low 10-year returns can occur if the market crashes immediately, or doubles in eight years then crashes in the last two, or merely goes sideways. The implication of high valuations is that better valuations will be available at some point in the future (they always have been), but nobody has any idea of the timing or whether those lower valuations will be achieved by price falling, earnings rising or some combination of these.
Anyway, my take on all this is that there are a number of flashing red lights for the global economy (Chinese government lowering growth targets, recession in Europe, now we can add S&P earnings that are flat to falling). Price action is bullish but I do not trust it beyond the steepest uptrend line you can draw, we've in fact seen this movie twice in the last two years: a flood of monetary stimulus guns the market for a number of months, the rally terminates almost immediately once the stimulus program is completed, followed by the sudden emergence of some 'unexpected' new crisis prompting a repeat of the whole cycle.
If anything seems to be different about this cycle it's rather that the capacity for government intervention at the margins is significantly more constricted than in the past. Deficits and debt are a problem everywhere. We have outright hawkish talk from the ECB and BuBa (or what passes for hawkish talk these days), the aforementioned lowering of the bar in China and a Fed which appears reluctant to engage in full-bore QE yet again.
I agree that if earnings fall off a cliff, PEs and consensus forecasts are worthless. But earnings fall off a cliff when there is a large credit bubble, which is not the case in 2012 or anytime since the 2008 crash. Earnings do not fall off a cliff because there are various risks out there - every single year, there are ALWAYS various risks out there, and almost none of them ever cause anything resembling a recession. As for Europe, aside from the fact that it is by now old news and almost totally priced in, US GDP is 90% domestic, it simply is not that big a factor on earnings (this is why ECRI and Hussman blew it with their recession call). Asia in 1997-98 showed how the economic decline of a large part of the world does not have a lasting impact on the US, and Europe is more resilient economically than Asia was back then. So, even if China totally collapses, it will not cause a US recession, and quite likely not even a slowdown of any significance. Just to re-iterate - the existence of *potential* macro risks is rarely if ever a bear point (otherwise every year the market would decline). To be a bearish influence requires clear evidence that those macro risks are actually occurring in reality (not just as potential), and that they are starting to impact market prices.
Very long-term forecasts are almost pure guesswork - events can change so much in 3-5 years, let alone longer, that it is almost totally pointless to look at the very long-term except to consider various contingencies and be ready in case evidence comes along that various scenarios are starting to play out. What you don't do is just guess that scenario X is going to happen rather than scenario Y or Z, then bet the ranch on it. As a trader, if the timing is wrong then the trade is wrong - end of story. For example, if the S&P goes to 2000 in the next 4 years, then margin contraction starts at the beginning of the next recession, then Hussman is totally wrong with his market call.
Regarding central bank policy, I agree that a tightening phase after easy credit is not as bullish as the very dovish phase, but this happens in every growth cycle and it does not stop stocks going up in every post-recession cycle. The Fed was tightening from 2004 onwards and the market went up 3 more years. It tightened from 1994 and the market went up 4 more years before the first 20% decline. Central banks generally start tightening first when the economy goes into growth mode - and that is a bull point, not a bear point. Rate hikes are a bear point when they come late in a cycle after several years of growth, once credit becomes lax and inflation threatens to run out of control. That is the traditional rate hike sell signal, not the mere whisperings of future hikes. Remember, rates could go up to 2% in the USA and still be lower than the dividend yield on stocks.
Yes, I am aware that stocks can fall or rise despite valuation. That is why I mentioned the price action, and why market action is always a critical component (basically, THE most important component) of any trading analysis. And if we take a look at what the market action is - it's bullish. Higher highs and higher lows. A clear breakout beyond the prior trading range from the autumn jitters. Small short-lived pullbacks that are quickly recovered from. That is how price acts in bull markets. It is a bear case when stocks are cheap but trade like crap - it is not a bear case when stocks are cheap and trade like a bull market!
The only real potential bear point is that we are near the 2011 highs (1370) after a large run, and have not yet broken through decisively. For that reason it's probably not a good idea to be maximum long right here, and some hedging with index futures or puts would be sensible until a clear breakout occurs. If the market momentum peters out, and/or breaks down significantly from current prices, then the technical picture would weaken. If a meaningful pullback is going to happen anytime soon, then here is pretty much the level it is likely to occur from - something like a move from 1375 back to the breakout level of 1290-1300, a 5-6% pullback, would be typical (and it would be a great buying opportunity at those prices). But IMO the risk isn't much more than that, at the moment there are no signs in the market action of any further problems other than a somewhat overbought condition.
