Fund manager John Hussman of the Hussman Funds has been one of the most vocal bears on Wall Street for the past few years.
The market has continued to rise strongly in the face of these warnings, which has clobbered Hussman’s reputation and performance. But those who are loud and early/wrong on Wall Street are always ridiculed … unless/until the trend changes. At that point, they become one of the heralded few who were “right.”
For the past six months or so, Hussman has been increasing the volume of his warnings about a potential market crash.
In this week’s note, Hussman shares his view that the market’s sharp rally over the past seven trading days is not likely the resumption of a rocketship bull market that began in 2009, but a standard bear-market rally.
Specifically, Hussman believes that the market rolled over a month ago and is now in the process of crashing.
Hussman correctly observes what many investors forget, which is that market crashes don’t happen in straight lines down. Rather, they generally consist of sharp plunges followed by sharp rallies followed by deeper plunges followed by rallies …
Only after many of these roller-coaster moves, Hussman observes, does the market ultimately hit bottom.
In support of this position, Hussman offers charts of five previous market crashes and then one of the market today.
Note the saw-tooth patterns:
Unlike many other market forecasters, Hussman is always careful to say that he doesn’t know what the market is going to do. But his analysis, which is far more rigorous than that of many who express more certain views, leads him to conclude the following:
As I noted last week, “Keep in mind that even terribly hostile market environments do not resolve into uninterrupted declines. Even the 1929 and 1987 crashes began with initial losses of 10-12% that were then punctuated by hard advances that recovered about half of those losses before failing again. The period surrounding the 2000 bubble peak included a series of 10% declines and recoveries. The 2007 top began with a plunge as market internals deteriorated materially (see Market Internals Go Negative) followed by a recovery to a marginal new high in October that failed to restore those internals. One also tends to see increasing day-to-day volatility, and a tendency for large moves to occur in sequence.”
My impression is that we are observing a similar dynamic at present. Though we remain open to the potential for market internals to improve convincingly enough to at least defer our immediate concerns about market risk, we should also be mindful of the sequence common to the 1929, 1972, 1987, 2000 and 2007 episodes: 1) an extreme syndrome of overvalued, overbought, overbullish conditions (rich valuations, lopsided bullish sentiment, uncorrected and overextended short-term action); 2) a subtle breakdown in market internals across a broad range of stocks, industries, and security types; 3) an initial “air-pocket” type selloff to an oversold short-term low; 4) a “fast, furious, prone-to-failure” short squeeze to clear the oversold condition; 5) a continued pairing of rich valuations and dispersion in market internals, resulting in a continuation to a crash or a prolonged bear market decline.