There is an old saying that when the tide goes out you get to see who is swimming naked.
It’s the underlying premise behind the latest missive from US fund manager John Hussman titled “The Ingredients of a Market Crash.”
Hussman says that the emerging divergence that he is seeing in markets – the lack of “trend uniformity” is a signal that all is not well.
Historically, when trend uniformity has been positive, stocks have generally ignored overvaluation, no matter how extreme. When the market loses that uniformity, valuations often matter suddenly and with a vengeance. This is a lesson best learned before a crash rather than after one. Valuations, trend uniformity, and yield pressures are now uniformly unfavorable, and the market faces extreme risk in this environment.
He says that last week’s saw tooth pattern in the daily moves of US markets signal to him that investors are now unwilling to support the market.
There is no underestimating just how bearish Hussman is at the moment when he says:
The most hostile subset of market conditions we identify couples overvalued, overbought, overbullish extremes with a breakdown in market action: deterioration of breadth, leadership and other market internals, along with a shift toward greater dispersion and weakening price cointegration across individual stocks, sectors and security types (what we sometimes call “trend uniformity”). The outcomes are particularly negative, on average, when that shift is joined by a widening of credit spreads. That’s a shift we observed in October 2000. It’s a shift we observed in July 2007. It’s a shift that we observe today.…
As conditions stand, we currently observe the ingredients of a market crash.
We have all been warned.