Market Direction and Stock Trends

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Complacency and the Fat Left Tail
By John P. Hussman, Ph.D.

* December 5, 2016

Presently, we observe wide internal market dispersion, including weakness among interest-sensitive securities, tepid uniformity across developed markets, and an abrupt whack to technology stocks last week. The combination of a steeply overvalued, overbought, overbullish market with hostile yield trends and divergent internals is not one we take lightly. It’s that combination that has most often been associated not only with emerging bear markets but with market crashes.

The nature of unpleasant skew is that while our overall market expectations are negative, we have to expect a tendency toward small net advances in any given week, while at the same time being prepared for vertical tail-risk to the downside. This may be a process of weeks, or months, or of periods where investor preferences shift intermittently between risk-seeking and risk-aversion. So we’ll align our outlook as the evidence changes. Our confidence isn’t invested in the outcome of any given week, but in the expectations we have for our investment discipline over the complete market cycle, and in the average outcomes of the market conditions we identify at each point in time. That’s important to understand, because having confidence in the average outcome of repeated instances is quite different from having confidence about the outcome of any specific instance. Even here, we’ll soften our near-term view if the overall character of market action improves. For now, our market view remains hard-negative.

https://hussmanfunds.com/wmc/wmc161205.htm

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