hussman's views
Friday Morning September 7, 2001 : Special Hotline Update
The Market Climate remains on a Crash Warning, which I take seriously. Based on current market conditions (not forecasts or opinions), we remain defensively positioned. Our discipline requires no forecasts - merely that we maintain a position that is consistent with the current Market Climate. That word "merely" is something of an understatement. When the whole investment world is obsessed with picking a bottom and forecasting the next turn, I feel quite alone in my insistence on identifying market conditions rather than forecasting them. There's only one other analyst I know who thinks this way - Richard Russell of Dow Theory Letters, whose daily commentaries are outstanding. He follows different methods, so we won't always agree, but he is very strict about his discipline, as we are. And there's nothing like discipline in the long run. Ask Warren Buffett.
We've got an oversold market here which is also collapsing internally. That sets the market up for enormous volatility and "illiquid" behavior. In daily action, I've noticed many more short term spikes, both up and down, than usual. Vacuums of selling one moment, and then vacuums of buying the next. Though I am not forecasting a crash, that is typical pre-crash action, and I certainly wouldn't rule one out. The fact is that I have absolutely no short term view about this market, except that I expect some breathtaking volatility. As for our actual investment position, that's always driven by the objective evidence, and on that basis we are defensive. Again, no forecasts are required there.
You may recall that in the August 23rd update, I noted a marked deterioration in some of our measures of trend strength were suggesting that the broad market could begin to weaken seriously. As it happened, that marked the high in the advance-decline line, which has turned down sharply. Equity-only advance-decline lines tracking stocks in the Dow and S&P indices have dropped to new lows, breaking under the March troughs. Meanwhile, the number of stocks hitting new lows has surged above new highs. On Thursday, the NYSE saw 165 new lows versus 70 new highs. On the Nasdaq, new lows outpaced new highs 295 to 48. It's certainly not true that every expansion in new lows results in a crash, but the market never crashes without a surge in new lows first. As you know, I had viewed the dearth of new lows to be the one shining positive in the technical picture. That positive is now gone.
That said, a new positive technical factor is the unusually long string of high "trading index" readings in recent weeks. Such a string usually points to an oversold market. High trading index figures essentially mean that very large stocks are under heavy liquidation. Unfortunately, most of the extreme historical signals emerged when valuations were also washed out. In the current instance, quite frankly, large cap stocks are under liquidation because they deserve to be liquidated. I hesitate to take much solace in that, and in any case, we wouldn't act on any signal that was not also accompanied by favorable trend uniformity. Trend uniformity could hardly be worse here.
Friday's action will be affected by two news items. The first is already in. Intel guided revenue expectations to the low end of their forecasts, but the report was not a complete disaster, so it prompted some after hours relief buying. My opinion about Intel's announcement is driven by analyst Ashok Kumar, who noted "It's inventory restocking now and not improvement in demand." Dan Niles of Lehman, the other thriving island of intelligence in a deep, dark sea of ignorance, noted that over half of Intel's quarterly revenues typically come in September. So in effect, Intel is just guessing. In any case, it may be worth the standard fast and furious bear market rally.
The second news item, of course, will be the employment report. The consensus view is that the unemployment rate will tick slightly higher, to 4.6%. My expectation leans closer to the 4.8%-5% range. The latest data on weekly claims moved back above 400,000, and last week's data was revised higher as well. But as I've noted before, the actual unemployment figure is an interplay between layoffs, new hires, and entry and exit from the labor force. Unusual behavior in any of those can throw the unemployment picture off on a month-to-month basis. My expectation is based on the underlying trends, which are still very unfavorable. Since we don't base our positions on such expectations though, we don't have anything "riding" on one particular outcome or another.
The bottom line is simple. The Market Climate continues to hold us to a defensive position. When the evidence shifts, our position will shift. Until then, this remains an environment where the range of possible outcomes is very wide, but the expected value of those outcomes, on average, is very poor. |
