(More) Roses Amid Garbage And Trap Doors

2026-05-11 11:57:00 ET

We know that conditions that join extreme valuations with unfavorable internals – particularly with lopsided bullish sentiment – have generally been followed by very poor market returns, on average. I’ve often referred to these as ‘trap door’ conditions. But looking at our 2024 hedging implementation, I asked – what if we extend that implementation a bit further to see if we can cultivate roses even there? Not only opportunities to vary the intensity of our downside hedges, but opportunities to adopt a constructive stance, albeit with a safety net, even in conditions that we’ve labeled as bearish ‘garbage.’

Strikingly, just over two percent of market conditions across history are roses – blooming amid garbage – often surrounded by the most speculative and seemingly dangerous conditions. Not surprisingly, they bloom from patches of soil that are already ‘indeterminate’ – periods when our September 2024 implementation already reduces the intensity of our downside hedges. The consistency of market gains in these periods provides a clear benefit in reversing the hedge from mildly bearish to ‘constructive with a safety net’ – removing the ‘upside cap’ on potential returns, while setting a safety net at modestly lower level. There’s still risk, of course, but that’s why the safety net is there.

Because ‘trap door’ conditions have been more frequent in recent years, these ‘roses’ appear in close to 15% of weekly periods during most recent 1-, 3-, and 5-year horizons. Yet they easily account for more than half of the S&P 500 total return over these horizons. As an example – in certain conditions that one would otherwise classify as quite risky, there can be selloffs amid very high levels of bullish sentiment and low bearish sentiment; where the lopsided bullish sentiment acts not as a negative ‘contrary’ indicator, but as a signal that speculators simply can’t shake their optimism. These selloffs are followed by ‘fast, furious, prone-to-failure’ rallies with striking regularity.

– John P. Hussman, Ph.D., How I Learned to Love the Bubble (Before it Bursts) , February 2026

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