"Given observations over at least one complete market cycle, we regularly find that the strongest average return/risk profile was associated with periods that one could identify in advance as having favorable valuation and (already) favorable market action, and that the poorest subsequent return/risk profile was associated with the bucket of periods having unfavorable valuation and unfavorable market action. Over the complete market cycle, this knowledge has generally been enough to achieve strong full-cycle returns with moderate risk. I generally try to avoid near term forecasts of market direction. The predictable amount of market return over a one-week period is overwhelmed by short-term volatility, and forecasts based on longer time horizons implicitly assume that the Market Climate we identify will not change over the forecast period. Given my general avoidance of forecasts, there are very few situations when I would state my views about the market as a ‘warning.’ Unfortunately, in contrast to more general Market Climates that we observe from week to week, the current set of conditions provides no historical examples when stocks have followed with decent returns. Every single instance has been a disaster. We can’t rule out the possibility that investors will adopt a fresh willingness to speculate (which we would observe through an improvement in market internals). Such speculation might prolong the current advance modestly, but even this would not substantially alter the risks that have ultimately been associated with overvalued, overbought, overbullish conditions."

– John P. Hussman, Ph.D., Warning – Examine All Risk Exposures, October 15, 2007

The S&P 500 had peaked a few days earlier, and would plunge by more than 55% during the global financial crisis. It is essential to learn the right lesson (discussed below) about the interaction between market internals, zero-interest rate policy, and overextended syndromes.

My first job in the financial markets was when I was 18, preparing high-low-close-volume charts by hand for an investment advisor, out of my dorm room at Northwestern. Fascinated by various regularities in the data, I spent countless hours in libraries and obscure record rooms, surrounded by stacks of books, files, and microfiche slides, making long-distance friends with statistical staff at the New York Stock Exchange, who would kindly send batches of historical market data, and typing all of it onto punch cards to run studies on the huge mainframe computer in the old Vogelback building. From those studies, I gradually developed the stock selection methods, valuation measures, and gauges of market internals that are essential elements of our investment discipline today.

Over the past four decades, I’ve also collected scores of interesting syndromes and relationships that tend to occur at market extremes, which I often discuss using terms like “overextension,” “dispersion,” and “reversal.” Occasionally, these are significant enough to prompt an interim update, outside of my regular market comments.