Tags: Hussman | stocks | crash | warning

Hussman: Stock Market Remains on 'Crash Warning'

By    |   Tuesday, 28 October 2014 10:45 AM

Star mutual fund manager John Hussman, president of Hussman Investment Trust, says the stock market may be in big trouble.

"The market climate remains on a crash warning," he reminds us in his weekly commentary of a warning he issued 14 years ago. His thinking hasn't changed all that much since then.

"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," he wrote in a recent commentary.

That includes:
  • An extreme syndrome of overvalued, overbought, over-bullish conditions.
  • A subtle breakdown in market internals across a broad range of stocks.
  • An initial air-pocket type selloff to an oversold short-term low.
  • A fast, furious, prone-to-failure short squeeze to clear the oversold condition.
  • A continued pairing of rich valuations and dispersion in market internals.
The S&P 500 index dove 10 percent from its Sept. 19 record high to its Oct. 15 low, but has since rebounded 8 percent.

The index had a trailing price-earnings ratio of 18.43 Friday, down from 18.63 a year earlier, according to Birinyi Associates.

"At the same time, it's important to remember that, as in 2000 and 2008, even when we identify market conditions as extremely hostile, short-term action can be something of a coin flip," Hussman warned.

Hussman believes the market might have a strong reaction to the any action from the Federal Open Market Committee, which meets this week.

"Given the 'all eyes on the Fed' nature of the financial markets here, any predictable component to short-term returns here is likely to be overwhelmed by both random noise and knee-jerk responses to whatever language the Fed chooses in its statement this week. This makes us quite agnostic about near-term market behavior," he noted.

"Longer term, we continue to view present market conditions as among the most hostile in history, coupling rich valuations with market internals that remain unfavorable on historically reliable measures," Hussman added.

"So allow for any sort of action in the near term, but recognize that from a full-cycle perspective, we continue to view a 40 to 50 percent market loss as having very reasonable plausibility over the completion of this market cycle."

Many individual investors apparently don't share Hussman's caution.

In the survey by the American Association of Individual Investors (AAII) of its members for the week ended Oct. 22, 49.7 percent were bullish on stocks for the next six months, the highest level since late August and up from 42.7 percent a week earlier.

Individual investors "viewed the recent downward volatility as a buying opportunity," Charles Rotblut, AAII Journal editor, said in a statement.

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Stocks could move either way in coming days, but a meltdown is distinctly possible, says star mutual fund manager John Hussman, president of Hussman Investment Trust.
Hussman, stocks, crash, warning
Tuesday, 28 October 2014 10:45 AM
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