The ASX is ripping higher, up 1% this morning to 5,326 after the solid lead from the US markets at the end of last week and Friday’s big global surge in stock prices.
But given the recent spike in volatility there is no guarantee that today’s euphoria won’t give way to more hand wringing, pessimism and selling either tomorrow or any other time in the next week or weeks.
This uncomfortable up-tick in intra-day ranges, and in the saw tooth patterns of consecutive up and down days is a reflection, symptom and cause of a change in investor risk appetites and the rise of risk aversion according to stock market analyst John Hussman in his latest weekly market commentary.
Hussman is dismissed by many as an “Uber Bear” but he is warning that the current market set-up is like the 1929, 1973, 1987, 2000 and 2007 markets.
Hussman says that market internals are looking weaker and while it is right to focus on longer term valuations which “give us information about the expected long-term compensation that investors can expect in return for accepting market risk.”
However at the moment his fear of a steep market fall comes from the increase in risk aversion which “creates an immediate danger of air-pockets, free-falls and crashes… in an environment where risk premiums are inadequate.”
It is a concern which seems grounded in the facts of capital flows and market movements of the past week. Money is once again flowing out of Asian markets and even with the recovery in stocks into week’s end US 10’s are still toward the bottom of their range for this year and, at 2.21%, except for last week’s low still the lowest level since May 2013.
That is the type of price action and price level that just screams uncertainty.
Indeed the level of disquiet in the market and the potential for an 1987 style meltdown was neatly summarised in a chart shared by Steve Burns showing the parallels between now and 1987.
— Steve Burns (@SJosephBurns) October 19, 2014
It’s a risk not a certainty though as Hussman notes.
A fresh improvement in market internals would signal an easing of risk aversion or even a resumption of risk-seeking preferences. If that shift occurs following a meaningful retreat in valuations, the combination would represent one of the most constructive investment conditions we identify. So our outlook will shift considerably as the evidence changes.
For the moment though he remains worried saying that, “At present, conditions remain unfavourable, and the potential for abrupt and vertical losses should not be taken lightly.”
You can read his full weekly commentary here.