In his latest weekly note, fund manager John Hussman introduces readers to what he calls “Aunt Minnies” of the market.
Over the years, I’ve noted that certain subsets of market conditions – occurring together – are associated with very specific outcomes, such as oncoming recessions, abrupt market weakness, strength in precious metals, and so forth. Such indicator subsets, or Aunt Minnies, are essentially “signatures” that often have very specific implications. In medicine, an Aunt Minnie is a particular set of symptoms that is “pathognomonic” (distinctly characteristic) of a specific disease, even if each of the individual symptoms might be fairly common. Last week, we observed an Aunt Minnie featuring a collapse in market internals that has historically been associated with sharply negative market implications.
Of the 3257 issues traded on the NYSE last week, 2955 declined and just 275 advanced. The S&P 500 has now abruptly erased nearly 8 months of progress. Moreover, we observed a “leadership reversal” with new 52-week lows flipping above the number of new 52-week highs. Our broader measures of market action deteriorated to a negative position as well. Historically, we can identify 19 instances in the past 50 years where the weekly data featured broadly negative internals, coupled with at least 3-to-1 negative breadth, and a leadership reversal. On average, the S&P 500 lost another 7% within the next 12 weeks (based on weekly closing data), widening to an average loss of nearly 20% within the next 12 months – often substantially more when the Aunt Minnie occurred with rich valuations and elevated bullish sentiment.
So, not surprisingly, he remains quite negative…
On last week’s selloff, we did shift about 2% more of the Strategic Total Return Fund’s assets toward precious metals (now at a still very small 4% exposure), with about 4% of assets in utility shares, and about another 3% in foreign currencies. The bulk of the Fund’s assets, of course, are in Treasuries, with a duration of just under 4 years – primarily in straight, intermediate-term Treasury bonds. Most likely, we will have numerous opportunities to shift our investment positions to reflect a longer-term outcome of inflation and generally rising interest rates in the second half of this decade. For now, credit fears are likely to boost demand for default-free government liabilities, holding down inflation pressures and prompting (ultimately incorrectly) less eager demand for commodity-related securities.
Contra Hussman’s view, here’s Deutsche Bank on why a groundwell of bullish data will send stocks higher >