Overbought again

The market is now fully ST overbought. The last couple of times this has happened it led to abrupt downdraft either immediately or within about 1 week. I'm thinking it will happen again given the gap and run nature of this market advance since the lows in early July. As usual, be prepared for head fakes in either direction as Mr. Market doesn't like too much company when going where he wants to go.

There was an excellent piece this past weekend by John Hussman over at www.hussman.net. Even though there have been times where I have disagreed with him and pointed out biases in his thinking, I make it a routine to read his commentary every week. Not only does he provide unique and in depth perspectives and has made some great calls (yup, he has some bad ones too like everyone else), he is amazingly knowledgeable about the intricacies of economics, financial markets, the fed and pretty much anything related to finance which makes me feel quite humble. He has my respect and you can learn a lot from him even if you don't agree with his market outlook.

I find that the weakness of guys like Hussman who know all this stuff about market is that they get a false sense of their abilities. They think that because of their abundant knowledge, they have the market figured out and they typically will reassure themselves by back testing models/theories they come up with. ...as if the market is some sort of equation that can be solved. As a result they become quite dogmatic with their views failing to adjust them quickly when they are flat out wrong or get their timing wrong (same difference in my book).

Here's the problem with knowing too much and models that use back testing.....the market is not an equation that can be solved. It's never the same from cycle to cycle and there's not enough data points to back test models. 100+ years may seem like a lot of data points but it's not in the context of human existence. In addition to that, although fear and greed never go away, as the decades go by government authorities learn from prior mistakes made (maybe not all the time). Liquidity, market transparency and global integration of markets have improved exponentially compared to the early days. Human knowledge and technological advancement has exploded exponentially as well as centuries have passed. The progesss we have made in the past 200 years dwarfs the progress made for 1000 years prior to that. The spread of democracy and capitalism across the world througout the decades is another huge paradigm shift.

All of these positive structural factors undermine dogmatic notions such as "true market lows only happen with the p/e of the market is ___" or "market peaks always happen when the p/e is ___" simply because this was the average in previous market cycles. When you take into account the above mentioned ongoing structural positives you can make the case that the average P/E multiple at cyclical tops and bottoms will be higher going forward as the human race progresses and as we learn from the mistakes of the past becoming more experienced with capitalism.

Now yes, there are also some negative structural problems as well. The moral decay of North American culture (Europe as well I guess), unfavorable demographic trends in developed nations and a substantial rise in debt levels. However, my point is that the stock market is a dynamic beast that is very new to human beings when you consider that they've been on this earth for about 200,000 years give or take a few millenniums. It also cannot be approached from a mathematical/scientific approach because it's underpinnings are in a constant state of flux. Conclusion: You need to approach the market as an artist more so than a scientist. You probably know a lot less about where the stock market is headed in the long run than you think because you don't know what types of major paradigm shifts lie ahead and just how well/poor the human race will advance. This is why you must always keep an open mind and reject dogmatic views.