Market Direction and Stock Trends

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Rare Signatures
By John P. Hussman, Ph.D.

* January 23, 2017

Last week, an unusual set of classifiers that we monitor raised red flags, with two of our three “crash signatures” now suggesting the likelihood of a market loss in excess of -25% in the months ahead (the last time these signatures were active was between April-October 2008). This would potentially represent the opening salvo of a more extended completion to the current market cycle. No single variable drives these signatures. Rather, they capture unsual combinations of market conditions that may include offensive valuations, dispersion across market internals, credit market weakness, lopsided bullish sentiment, Federal Reserve tightening, or other features. While these signatures are quantitative, my impression is that there is far more potential for economic and social disruption than appears to be reflected in the current speculative pitch. I should also be clear that these signatures are not forecasts but classifications that we’ve constructed to identify highly unusual events. The difference is that a forecast says “we expect this particular outcome in this specific instance,” while a classifier says “we identify the same signature of conditions that has regularly preceded this particular outcome in the past.” It’s a subtle distinction, but an important one. We needn't rely on forecasts. Rather, we continue to align ourselves with the prevailing evidence at each point in time, and our outlook will shift as the evidence does.

http://hussmanfunds.com/wmc/wmc170123.htm

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