The following article is an excerpt from John Hussman's Weekly Market Comment, Hussman Funds.
May 11, 2009 - Just a performance note – on Wednesday and Friday, we observed normal pullbacks in a large number of our top holdings, all well within their recent trading ranges. However, this was coupled with frantic short-covering in financials, which drove the S&P 500 higher at the same time our holdings were pulling back. This gap in performance between stocks that we own and stocks that we don't own (but are still in the indices we use to hedge) is known as a “basis widening.” These generally leave us feeling like we've been on the rack in a Medeival dungeon. But we've seen these before, and they often reverse themselves over the course of a few days or weeks. The main factor to note is that the pullbacks across our largest holdings have been run-of-the-mill. The driving factor was the short squeeze in financials on the notion that the stress tests were an “all clear” signal. The modest “anti-hedge” we have in index calls was not sufficient to offset the spike in financial companies, many which remain nearly insolvent.
With regard to the recent market advance, as I noted in the December 15, 2008 comment (Recognition, Fear and Revulsion):
“While we've seen a good deal of fear, the stock market tends to go through a great deal of sideways action after panics like we've observed. It's likely that stocks will trade in a very wide 25-35% range for months. We have to be particularly observant as stocks approach the higher end of that range.
“Bear markets tend to experience a series of separate lows on what I'd call recognition, fear, and revulsion. The first selloff of a bear market is on “recognition” – the growing awareness among investors that “boom” economic conditions are in question. Investors generally continue to deny the likelihood of a bear market or a recession, so the phrase “healthy correction” usually comes up a lot. Unlike true “healthy corrections,” however, these periods tend to begin from untenable valuations, overbought conditions, generally rising interest rates, and deteriorating market internals.
To read the complete note, click here.
Source: John Hussman, Hussman Funds, May 11, 2009
Hat tip: Investment Postcards
