Those Who Ignore History: Current Market Conditions Anticipate Worst Post-War Declines

The stock market is up - way up. Even before the Bin Laden news this was cause for concern. The fundamential reason is that the underlying economy remains weak, so this appears to be another financial bubble driven by Central Bank largesse to the investing community, particularly its traders. Gregory White comments on market analyst John Hussman's prediction in Business Insider:

"Current market conditions mimic those seen in four of the biggest post-war market declines in U.S. history, according to John Hussman.

Hussman considers this "overvalued, overbought, overbullish, rising-yields syndrome" market similar to those of 6 others in recent history, and more "extreme" than any of those moments.

In previous instances where markets fit Hussman's criteria, this is what occurred, according to Hussman:

August 1972, November-December 1972: The S&P 500 quickly retreated about 5% from its August peak, then advanced again into to its bull market peak near year-end (about 6% above the August peak). The Dow then toppled -12.3% over the next 50 trading days, and collapsed to half its value over the following 22 months.

August 1987: The market advanced about 6% from its initial signal into late August. The S&P 500 then lost a third of its value within 8 weeks.

June 1997: The only mixed outcome, during the strongest segment of the late 1990's tech bubble. The S&P 500 advanced another 10% over the following 8 weeks, surrendered 4%, followed with a strong advance for several months, surrendered it during the 1998 Asian crisis, and then reasserted the bubble advance. Over a 5-year period, the overvaluation ultimately took its toll, as the the S&P 500 would eventually trade 10% below its June 1997 level by the end of the 2000-2002 bear market. Still, the emergence of the internet, booming capital spending, strong economic growth and job creation, rapidly falling inflation, and dot-com enthusiasm evidently combined to overwhelm the negative short- and intermediate-term implications of this signal.

July 1999: The S&P 500 advanced by 3% over the next two weeks, then declined by about 12% through mid-October, and after a recovery to the March 2000 bull market high, the S&P 500 fell far below its July 1999 level by 2002.

March 2000: The peak of the bubble - the S&P 500 lost 11% over the following three weeks, recovered much of that initial loss by September, and then lost half its value by October 2002.

May/June 2007, July 2007: The S&P 500 gained 1% from the late-May/early-June signal to the July signal, then lost about 10% through August 2007, recovered to a marginal new high of 1565.15 by October (about 1% beyond the August peak), and then lost well over half of its value into the March 2009 low.

February 2011, April 2011: A cluster of signals in the 2-week period between February 8-22 immediately followed by a decline of about 7% over the next 3 weeks. As of Friday, the market has recovered to a marginal new high about 1.5% above the February peak.

When Hussman's criteria are met, we've seen the worst four market selloffs since World War II, but also one rise and another non-event.