The Sad Technical State of the Market

John P. Hussman of Hussman Funds sees the situation pretty accurately as far as I am concerned:

As of last week, the Market Climate for stocks was characterized by unfavorable valuations and mixed market action. On the valuation front, the S&P 500 is currently priced to deliver an average total return over the next decade of about 6% annually – one of the lowest figures on record except for the late 1920's, the richest valuations of the 1960's (which were followed by about 17 years of flat returns) and the overvalued and ultimately unrewarding period since the late 1990's. Importantly, that calculation does not assume any long-term impact of the recent credit crisis, but is instead based on the maintenance of the long-term peak-to-peak growth channel that has characterized S&P 500 earnings for most of the past century.

The stock market is not cheap by any means, except in comparison to strenuously overvalued and ultimately unrewarding valuations of the past. This fact is coupled with investment advisory bearishness of only 16.3%, strenuous overbought conditions on an intermediate-term basis, and emerging non-confirmations (including for example, breadth as measured by advances versus declines, which remains below the peaks of a few months ago, as do several volume-based measures). That said, there is also a large contingent of investment advisors in the “correction” camp. That suggests that we may observe a somewhat more extended tendency toward shallow selloffs followed by sharp rebounds, as investors looking for a correction look to “buy the dips.” Though that may be reasonable behavior here, my impression is that trading such dips in anticipation of sustained market gains relies too much on the maintenance and extension of already stretched valuations.

My main divergence with Hussman is that the "shallow" selloffs will, in my view, become floods of panic at some point, given that Bernanke hasn't printed any money to support the current structure of the market since February.