Warning with a Capital “W”

Posted by ohn P. Hussman, Ph.D.

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We continue to classify the prospective equity market return/risk profile within the most negative climate we identify. The basis of this classification is fairly straightforward. Historically, once an extended speculative period of extreme overvalued, overbought, overbullish conditions gives way to increasing risk-aversion, as indicated by deterioration in market internals (and particularly in the presence of hostile yield trends in the form of widening credit spreads), the stock market has become vulnerable to vertical losses. Though not every instance of this syndrome has been followed by a market collapse, every notable panic and market crash across more than a century of data has featured that basic setup.

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