John Hussman, an astute observer of the stock market and head of Hussman Funds, warns that there's an Aunt Minnie at work on the stock market these days. And no, that's not good news for volatility-hating investors.
Aunt Minnie is actually a medical term, referring to a set of symptoms that, on their own, are fairly common. Together, though, they can indicate a specific disease.
"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," Mr. Hussman said in a note to investors. "Such indicator subsets, or Aunt Minnies, are essentially 'signatures' that often have very specific implications."
Some of these signatures are technical. Declining stocks within the New York Stock Exchange are far greater than rising stocks. The S&P 500 has given up eight months of gains very suddenly. And the number of stocks hitting 52-week lows has flipped around, far exceeding the number of stocks hitting 52-week highs.
Mr. Hussman noted that stocks tend not to fare well when faced with such a wide assortment of bearish indicators, falling a further 20 per cent within 12 months - and sometimes more when the Aunt Minnie coincided with rich valuations.
"Given my aversion to market 'forecasts,' I hesitate to interpret this record as a hard prediction of what will occur in this particular instance," he said.
"This is particularly true because in a handful of instances (2/9/68, 9/12/75, 10/20/78 and 4/30/04), the outcomes were fairly benign. Still, the average outcome has been awful. For that reason, the combination of unfavorable valuations and collapsing market internals is a sharp warning to examine risk exposures carefully here."
Here are several example of what can go wrong, though:
"The most recent instance was November 9, 2007, which was followed by a market loss of more than 50 per cent, but the instances also include September 22, 2000, prior to a nearly two-year bear market decline; July 14, 1998 prior to the 'Asian-crisis' mini-crash; July 27, 1990, at the beginning of the pre-Gulf War plunge; October 9, 1987, just prior to that market crash; July 2, 1981 at the beginning of the 1981-82 bear market and again in May 21, 1982, following a strong rally during that bear market, leading into a steep decline to the final lows; November 9, 1973 (just after a swift rally during the 1973-74 bear market, and leading into the main portion of that loss); and November 21, 1969, at the beginning of the 1969-70 bear market."
David Berman