US fund manager John Hussman is out with his latest weekly Market Comment ominously titled “Air-Pockets, Free-Falls, and Crashes”.
It’s a piece which warns of the potential for large downside risk after last week’s trade which saw the S&P 500 have, on consecutive days, both its biggest fall and largest rise for the year.
Over the weekend, traders and investors would have had time to think about their exposure to the market, the risk of further losses, and what they might do to ameliorate the damage that could occur in their investment portfolio in the days and weeks ahead.
Hussman warns that the current market condition of “overvalued, overbought, overbullish extremes” is consistent with mostly positive week to week returns with a risk of “large, abrupt losses”.
Present conditions create an urgency to examine all risk exposures. Once overvalued, overbought, overbullish extremes are joined by deterioration in market internals and trend-uniformity, one finds a narrow set comprising less than 5% of history that contains little but abrupt air-pockets, free-falls, and crashes.
Hussman says that traders don’t even need to get outright bearish or “require forecasts about market direction”. They just need to start practising prudent risk management and the market will see traders selling stocks, buying put options and going into cash.
We view the strongest market return/risk profiles, and the best opportunities for unhedged investment, as coupling a material retreat in valuations with an early improvement in market internals. Now is the antithesis of those conditions.
A forecast is not fact, but once again, we have all been warned.
You can read Hussman’s full weekly comment here