John Hussman on Stocks: Beware the Tornado Warning

by: John Hussman

Excerpt from fund manager John Hussman’s weekly essay on the US market:

Financial markets have a particular way of issuing a tornado warning: deteriorating quality of market action across a wide range of market internals. We can observe it through the “heavy” price/volume behavior of recent months, through flagging breadth (advances versus declines), through the poor behavior of interest sensitive securities, and through measures of internal turbulence (industry divergences, large numbers of both new highs and new lows, abrupt flips from new highs dominating to new lows dominating), among others.

And not surprisingly, financial tornados are more likely to strike when such tornado warnings are in effect. When our measures of market action have been unfavorable, as they are now, the stock market has generally followed with unsatisfactory returns, particularly when valuations are also high. Indeed, virtually every significant market crash or panic of note has occurred when market conditions were already characterized by rich valuations and unfavorable internal market action. It's also interesting that the news following periods of unfavorable market action also tends to be broadly unfavorable. Markets are forward looking.

In short, until we observe an improvement in the quality of internal market action (which we don't observe here) we shouldn't be surprised to see news – economic as well as political – having a generally negative tone.