Be Alert, Stocks Could Get Cut In Half

Be Alert, Stocks Could Get Cut In Half

Be Alert, Stocks Could Get Cut In Half


Stocks could lose 50% their value + if the history of valuation cycles is any indication, cautions mutual-fund manager John Hussman, President of Hussman Investment Trust.

He is correct and I have been calling for a Fibo retracement in the S&P 500 of 38 to 55% and the higher the S&P 500 goes the deeper the dive.

Mr. Hussman also said participants should expect total returns of just 2% a year for next 10 years.

“From present valuations, a market loss of that magnitude would not be a worst-case scenario, but merely a run-of-the-mill completion of the current market cycle,” he writes in an 18 April commentary. “Since the dividend yield on the S&P 500 exceeds 2 percent here, that also implies that we fully expect the S&P 500 Index to trade at a lower level in 10-12 years than it does today.”

The S&P 500 has risen 15% since the 10 February lows, when collapsing oil prices and worries about a slowing Chinese economy pressured stocks.

Since then, Crude Oil has risen 65 to a high of about 43 bbl on speculation that the producing countries will agree to cut output.

Also, the US Fed signaled that interest-rate hikes will be gradual on real concerns about slowing economic growth.

Below is a list of past frames of when equity markets sank after getting too expensive, as follows:

  1. 1901 (followed by a 46% market retreat the following 3-year frame)
  2. 1906 (followed by a 45% retreat the following year)
  3. 1929 (followed by a 89% collapse the following three years)
  4. 1937 (followed by a 48% loss the following year)
  5. 2000 (followed by a 49% market loss the following 2 years)
  6. 2007 (followed by a 57%market loss the following 2 years)
  7. Plus, few lesser extremes occurred in the 1960’s and 1970’s, followed by market losses in the 35 to 50% range.

Certainty, we can blames the US Fed for encouraging this wild speculation with its policies of driving down borrowing costs in an attempt to fuel the economy, cutting interest rates to Zero+ per cent in Y 2008, as the bursting of a major government “blown” housing bubble led to a global economic crisis.

The Fed’s monetary policies have produced no benefit to the real economy compared with what could have been predicted solely on the basis of non-monetary variables. Such policies have fueled the 3rd financial bubble since Y 2000. The collapse will not be pretty.

Economist Ed Yardeni, notes that unconventional monetary policies like QE (quantitative easing) and Zero+ interest rates have become so commonplace that they can now be considered conventional, and as we are seeing ineffective.

Always remember the name of this Wall Street game is to make money, and that in times like these cash money is an asset.

Tuesday, the US major stock market indexes finished at: DJIA +49.44 at 18053.60, NAS Comp -19.69 at 4940.33, S&P 500 +6.46 at 2100.80

Volume: Trade was moderate with about 878-M/shares exchangeing hands on the NYSE

  • DJIA +3.6% YTD
  • S&P 500 +2.8% YTD
  • Russell 2000 +0.4% YTD
  • NAS Comp -1.2% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.37) Very Bullish (0.51) Bullish (0.33) Bullish (0.26)
HeffX-LTN Analysis for SPY:  Overall Short Intermediate Long
Bullish (0.34) Bullish (0.34) Bullish (0.37) Bullish (0.31)
HeffX-LTN Analysis for QQQ:  Overall Short Intermediate Long
Bullish (0.29) Bullish (0.28) Bullish (0.25) Bullish (0.35)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Very Bearish (-0.50) Very Bearish (-0.59) Bearish (-0.40) Very Bearish (-0.50)

Stay tuned…

Paul Ebeling, Analyst

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