Tags: Hussman | stocks | Fed | risk

Hussman: Stocks May Be on the Edge of a Cliff

By John Morgan   |   Tuesday, 25 Jun 2013 07:52 AM

Stock investors are hurtling toward a risk-aversion stance, a bearish mindset that could forecast more losses in an overvalued, overbought and overbullish market, according to investment manager John Hussman, founder of Hussman Funds.

Hussman, a consistent critic of Federal Reserve policy, said in his weekly newsletter that the path of least resistance for stocks is down for now.

"Make no mistake, last week's [stock market] decline was not because of a hawkish Federal Reserve, but in spite of a dovish one," he wrote.

Editor's Note:
See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

In remarks last Wednesday, Fed Chairman Ben Bernanke pledged to maintain quantitative easing (QE) until at least 2014, unless the economy improves enough before then to commence withdrawing support.

"Investors who believe that 'QE makes stocks go up' — with no other condition required — just got a handwritten, perfumed note from Bernanke to keep buying," Hussman said.

The fact stocks are deteriorating broadly despite continued Fed support may mean some other negative factor at play, in Hussman's view. He said credit problems in China, disappointing corporate earnings, general economic weakness or some unidentified problem may soon be revealed.

"But whatever the reason, investors appear to be shifting from risk-seeking to risk-aversion."

Current overbought conditions, coupled with weakness in Treasury bonds and other interest-rate sensitive sectors, reversals in stock leadership and poor market breadth add up to "conditions that have historically preceded panics and crashes," Hussman explained.

In fact, he suggested current conditions are very similar to those in 1929, 1987, 2000 and 2007 — when stock markets melted down dramatically.

As alternative to stocks, Hussman suggested Treasury bonds "seem an increasingly reasonable place to invest, particularly if yields rise further." He asserted that gold and commodities will be fighting headwinds until interest rates stabilize.

In the meantime, stocks in general are the most vulnerable major asset class until the forces moving the market swing more clearly into focus.

"It's tempting to wait until a stronger and more specific 'catalyst' emerges, but the financial markets have demonstrated repeatedly over time that market losses come first, and the catalyst becomes evident afterward."

U.S. stocks were off sharply in early trading Monday, following selloffs in Asia and Europe.

"We've had this great performance in stocks without great economic growth," Larry Kantor, New York-based head of research at Barclays Plc., told Bloomberg TV. "Those days are over. I suspect over the next couple of months U.S. growth is going to be a little weaker than people are anticipating."

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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