High Risk & Low Conviction"Short-term oversold conditions offer a sense of potential knee-jerk dip-buying behavior, but the conviction of that behavior is often fairly weak and short-lived. Meanwhile, extreme valuations imply the likelihood of steep market losses over the complete cycle, and also for poor S&P 500 total returns on a 10-12 year horizon, but valuations often have little effect on near-term market behavior. Instead, the behavior of the market over shorter segments of the cycle is driven not only by valuations but also by the preference of investors toward risk-seeking or risk-aversion. That’s really the aspect of present conditions that now gives extreme valuations their bite. Investor risk-preferences, as conveyed by the uniformity or divergence of market internals, are the hinge between overvaluation that persists and overvaluation that devolves into air pockets, free-falls, and crashes. Given that deteriorating market internals (particularly since mid-September) have continued to suggest increasing risk-aversion among investors, it’s not at all clear that short-term “oversold” measures will provide much support. For our part, we continue to classify market conditions among the most hostile market expected return/risk profiles we’ve identified across history. Regardless of the potential for a near-term 'relief rally,' our defensive market view is likely to shift only as the combination of valuations and market action improve."
- John Hussman
LINK HERE to the essay