Hussman Weekly Market Comment: Green Shoots, Weak Roots

There's no denying that the beliefs of investors have been far more important, in the intermediate term, than economic realities, which are revealed more slowly and sporadically. Yet despite the high level of bullishness here, the market has gained only a few percent beyond its September highs. Most of what we are seeing now is a tendency to make marginal new highs, back off slightly, and then recover that ground enough to register another marginal new high. As I've noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, overbullish sentiment, and upward yield pressures, the market's tendency is exactly that - to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere. Being defensive in that situation can make each slight new high feel excruciating, even if the market is not making much net progress. I remember that my own patience with this process was tested in mid-2007, when I quoted Wallace Stevens - "Does ripe fruit never fall? Or do the boughs hang always heavy in that perfect sky?"

Given this context, the next few months are likely to be extremely important. The present overvalued, overbought, overbullish, yields-rising conformation holds us back from accepting market risk here in any case. But the market is quite likely to clear this condition in one way or another over the next few months, most likely with an abrupt decline. Meanwhile, the next few months will also afford us better clarity with respect to the actual condition of the delinquency/foreclosure situation, as well as a look at the off-balance sheet entities that, per FASB rules, must now be disclosed on the balance sheet of financial institutions (where Freddie Mac has already warned the accounting change will significantly impair its solvency).

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Related link: Ripe Fruit