- Stock market dispersion is widening as technical indicators show sell signals, suggesting a turbulent road ahead for equities.
- Investment manager John Hussman points out that these indicators haven’t flashed sell simultaneously since the 2007 financial crisis.
All is not well beneath the surface of the US stock market.
Market dislocations are running rampant, suggesting turbulence ahead that could go well beyond the modest weakness major indexes have seen over the past two weeks. And to make matters worse, some of the market’s most ominous technical indicators are flashing serious warning signals.
John Hussman, the president of the Hussman Investment Trust and a former economics professor, is particularly concerned about the growing dispersion of stock market returns. Dispersion reflects how widely market returns are distributed, and it’s an important measure to watch in order to assess the crosscurrents that drive broader indexes.
On November 14, the number of New York Stock Exchange companies setting new 52-week lows climbed above the number hitting new highs, representing a “leadership reversal” that Hussman says highlights the deterioration of market internals. To make matters even more dicey, stocks also received confirmation of two bearish market breadth readings, known as the “Hindenburg Omen” and “Titanic Syndrome.”
According to Hussman, these three readings haven’t occurred simultaneously since 2007, when the financial crisis was getting underway. And the previous instance before that was in 1999, right before the dotcom bubble crash. That’s not very welcome company.
Here are some more details around the Hindenburg and Titanic indicators referenced above:
- Hindenburg Omen — A sell signal that occurs when NYSE new highs and new lows each exceed 2.8% of advances plus declines on the same day. Note that on November 14, they totaled more than 3%.
- Titanic Syndrome — A sell signal that is triggered when NYSE 52-week lows outnumber 52-week highs within seven days of an all-time high in equities. Stocks most recently hit a record on November 8.
“While the names of these indicators may seem silly and overly menacing, they actually get at something very serious,” Hussman said. “They capture situations where the major indices are near new highs, yet market internals show much greater divergence. In my view, this type of market behaviour is indicative of a subtle shift in the preferences of investors, away from speculation and toward risk-aversion.”
It must be noted, however, that Hussman has been sounding the alarm on a major stock market selloff for years now. In a recent blog post, he said that “Wall Street has gone completely mad” as investors continue to buy with stocks at stretched valuations, and called for negative equity returns over the next 10 years.
Throughout the second half of 2014, he issued regular warnings about a crash, even going as far as to say stocks were crashing in October 2014. The S&P 500 has rallied another 30% since then.
Hussman’s view also stands in stark contrast to many experts across Wall Street — most notably the equity strategists responsible for each firm’s S&P 500 forecasts. They forecast that the benchmark will be little changed from current levels into year-end, according to data compiled by Bloomberg.
Looking ahead to 2018, UBS sees the S&P 500 climbing as much as 9% over the course of the year. Meanwhile, Goldman Sachs thinks US stocks will be kept afloat by speculation and progress around tax reform.
With all of these varying opinions floating around, it’s easy for investors to get confused. At this point, its seems like the best approach is for even the most bullish investors to proceed with caution.