A Hussman Highlight

From John Hussman's most recent market comment (emphasis added in bold).

The S&P 500 is now behind Treasury bills for the period since November 2005, which underscores the difficulty in retaining market returns that are achieved in periods of rich valuation. It's certainly possible that we will recruit enough improvement in market internals to infer that investors are once again willing to load up on market risk, but at present, we don't have that evidence.

Again, my guess, and it's just a guess, is that a sustained rally--if only a sustained bear market rally--will be more likely a) at the point that investors fully accept recession as common knowledge, so they can start putting "recession" behind them without fear that it's still ahead, or b) at the point the S&P 500 declines a full 20% from its high (anywhere below 1250)--again, so they can start putting "bear market" behind them without fear that it's still ahead. Strangely, the market often responds well when investors recognize that their fears have become reality, because at that point investors can at least begin to believe that the worst is behind them.

That doesn't mean that things won't, in fact, deteriorate beyond a 20% market decline or a shallow and well-recognized recession. But as I've frequently noted, most bear markets are not simply one-way movements. Bear markets typically comprise two, three or more separate 10-20% declines, punctuated by fast, furious rallies. It's easy to forget that the 2000-2002 bear included three bear market advances of 20% from intra-day low to intra-day high, as well as numerous smaller advances, all of which were surrendered in subsequent plunges to new lows.

This is a good time to review what bear markets look like, because even though our own focus is always on the prevailing Market Climate, an understanding of how such market periods evolve can be helpful in riding one out. As I wrote in April 2000, bear market psychology typically evolves something like this:

"This is my retirement money. I can't afford to be out of the market anymore!"

"I don't care about the price, just get me in!!"

"It's a healthy correction"

"See, it's already coming back, better buy more before the new highs"

"Alright, a retest. Add to the position--buy the dip"

"What a great move! Am I a genius or what?"

"Uh oh, another selloff. Well, we're probably close to a bottom"

"New low? What's going on?!!"

"Alright, it's too late to sell here, I'll get out on the next rally"

"Hey!! It's coming back. Glad that's over!"

"Another new low. But how much lower can it go?"

"No, really, how much lower can it go?"

"Good Grief! How much lower can it go?!?"

"There's no way I'll ever make this back!"

"This is my retirement money. I can't afford to be in the market anymore!"

"I don't care about the price, just get me out!!"

Discipline. Risk Management. Capital preservation. Words to live by in any market environment--and especially this one.