As we survey the current state of evidence from market and economic data, my greatest concern remains that we may be nearing a point that mathematicians call a "discontinuity." With respect to the stock market, valuations remain uncomfortably rich, and market action is tenuous. As I noted last week, "Keep in mind that after a clear break of major support levels, markets often recover back to that previous support, which can create a feeling of 'all clear' complacency. Be careful."
Having largely cleared the recent oversold condition of the market, we are at an important inflection point. A further recovery in market action would most likely create modest further demand from already well-invested speculators and trend followers, and modest offsetting supply from already defensive value-oriented investors, allowing a dull but moderate continuation of upside progress. On the other hand, a deterioration in market action would likely trigger a substantial amount of liquidation by speculators, into a market where fundamentally-oriented investors would require large price adjustments in order to absorb it. That outcome could result in a price discontinuity.
As I've noted before, if something induces one trader to sell, the market must move in a way that either removes that impulse, or induces another trader to buy. In equilibrium, there is no other possibility. When an overvalued market loses support from market internals, it frequently produces discontinuous outcomes ranging from brief "air pockets" to "panics" to "crashes." Emphatically, I am not forecasting or predicting a discontinuity as the only possible outcome, but it is important to recognize that the risk is elevated.
Read the complete Hussman Weekly Market Commentary for this week.
Having largely cleared the recent oversold condition of the market, we are at an important inflection point. A further recovery in market action would most likely create modest further demand from already well-invested speculators and trend followers, and modest offsetting supply from already defensive value-oriented investors, allowing a dull but moderate continuation of upside progress. On the other hand, a deterioration in market action would likely trigger a substantial amount of liquidation by speculators, into a market where fundamentally-oriented investors would require large price adjustments in order to absorb it. That outcome could result in a price discontinuity.
As I've noted before, if something induces one trader to sell, the market must move in a way that either removes that impulse, or induces another trader to buy. In equilibrium, there is no other possibility. When an overvalued market loses support from market internals, it frequently produces discontinuous outcomes ranging from brief "air pockets" to "panics" to "crashes." Emphatically, I am not forecasting or predicting a discontinuity as the only possible outcome, but it is important to recognize that the risk is elevated.
Read the complete Hussman Weekly Market Commentary for this week.
