Some interesting comments here from Richard Russell and John Hussman who both believe we’re in the early stages of the second half of the primary bear market that started in 2007. Hussman writes:
“As for my opinion about market conditions, I have to agree with Richard Russell, who said last week “I think we’re now in the second half of the primary bear market that started back in 2007. It won’t be pretty.” Richard is undoubtedly the pre-eminent authority of Dow Theory, which is often disparaged, but actually holds up nicely in historical data if you make Rhea and Hamilton’s writings operational. As a side note on this, from a signal extraction standpoint, you can think of the Transports as carrying a signal about demand and distribution, and the Industrials carrying a signal about production, and both carrying a common signal about more general factors like risk aversion and so forth. From that perspective, the initial weakness we saw in the Transports, coupled with resilience in the Industrials, has been consistent with the buildup of unsold inventories we’ve seen in recent months. The groaning weakness of both indices in recent weeks – breaking simultaneously below the sideways channel that Hamilton refers to as a “line” – is a classic Dow Theory sell signal. While we don’t use Dow Theory formally in our own work, it does provide some interesting confirmation of our analysis at times, for example, in early 2003 when we removed about 70% of our hedges (see the April and May 2003 market comments, also see Notes on Risk Management for a discussion of why we did not respond similarly in 2009).
My impression is that Richard’s comment about the “second half” of the primary bear market reflects the view that – unlike most bear markets and economic downturns – the downturn that began in 2007 was never really resolved, but was instead just pushed off and deferred by massive monetary interventions, accounting changes, and the like. This, in addition to the fact that the S&P 500 remains below its 2007 peak. So rather than being a distinct primary bear market, and a distinct economic downturn, what we’re likely to observe ahead will be largely a continuation of the original unresolved mess of bad credit and unrestructured debt, now also writ large across Europe.”
I wish I had a crystal ball that allowed me to see market cycles like this. As for what I do now, which is the here and now (I don’t believe in forecasting much more than a quarter in advance because I think it’s mostly impossible), there does not appear to be recessionary signs in the USA. But the risk of both a profit and real recession are rising substantially as we move into 2013. We’ll revisit as we move into the year….