The world's biggest stock bear says we're in a dangerous 'trap-door situation' — and explains why you shouldn't be fooled by the market's recent surge

trader market crash

  • John Hussman — the outspoken investor and former professor
    who’s been predicting a stock crash — says traders shouldn’t be
    fooled by the equity market’s big ongoing rebound.
  • Hussman explains why he remains bearish on the market in the
    long term, and breaks down why stocks are still wildly overvalued,
    even after the December meltdown.

As
stocks
continue to rip higher following their Christmas-week
meltdown, it would be easy to sit back and assume the worst is
over.

After all, we’ve already recovered 14% from the 20-year low
reached on Dec. 24 — a level that brought the S&P
500
within a hair of a bear market. To hear optimists tell it,
the market shook out some negative drivers and is now free to
resume its climb higher at more reasonable valuations.

But John
Hussman
is not particularly known for his optimism — at least
not since stocks reached what he views as eye-bleeding valuations.
And he contends that the coast is far from clear.

Hussman — the former economics professor and current president
of the Hussman Investment
Trust
— notes that despite the close brush with a bear
market, the stock market is still far too expensive to be
considered attractive.

That’s reflected in the chart below, which shows stocks are
still less than 10% below what he describes as the “steepest
speculative extreme in history.”

Screen Shot 2019 01 18 at 1.05.56 PM

And while the valuation argument is his core point, Hussman is
also intensely focused on what he calls “market internals,” which
are a series of indicators that take the overall pulse of the
equity landscape.

Hussman has long argued that those internals are pointing in an
overwhelmingly negative direction. And while he acknowledges they

briefly flashed positive
after the December meltdown, he says
they’re now back in their long-running negative territory.

“Aside from the likelihood of a knee-jerk market spike on any
variant of the word ‘deal,’ we continue to be in a trap-door
situation with respect to market risk,” Hussman said, referring to
possible trade-war progress.

He continued: “Though we did take the edge off of our negative
outlook to allow for a scorching relief rally, my present view is
that the overall function of that relief rally has been
served.”

So where do we go from here? If Hussman is to be believed, the
market could plummet
roughly 55%
from current levels. That would bring the S&P
500 to 1,192, which is the level he says would represent a
fairly
run-of-the-mill-cycle completion
.”

Hussman’s track record

For the uninitiated, Hussman has repeatedly made headlines by
predicting a
stock-market decline exceeding 60%
and forecasting a
full decade of negative equity returns
. And as the stock market
has continued to grind mostly higher, he’s persisted with his
calls, undeterred.

But before you dismiss Hussman as a wonky perma-bear, consider
his track record, which he breaks down in his latest blog post.
Here are the arguments he lays out:

  • Predicted in March 2000 that tech stocks would plunge 83%, then
    the tech-heavy Nasdaq
    100
    index lost an “improbably precise” 83% during a period from
    2000 to 2002
  • Predicted in 2000 that the S&P 500 would likely see
    negative total returns over the following decade, which it did
  • Predicted in April 2007 that the S&P 500 could lose 40%,
    then it lost 55% in the subsequent collapse from 2007 to 2009

In the end, the more evidence Hussman unearths around the stock
market’s unsustainable conditions, the more worried investors
should get. Sure, there may still be returns to be realized in this
market cycle, but at what point does the mounting risk of a crash
become too unbearable?

That’s a question investors will have to answer themselves. And
one Hussman will clearly keep exploring in the interim.

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FANG — a $135 billion investor says a new group of stocks is
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Source: FS – All – Economy – News
The world's biggest stock bear says we're in a dangerous 'trap-door situation' — and explains why you shouldn't be fooled by the market's recent surge