Given the volatility of the US stock market over the past six weeks, prognosticators have been issuing a variety of opinions as to when the market might bottom out. While some experts are predicting the bull market will resume as soon as China’s economy and oil prices stabilize, there is at least one man who is predicting some very serious problems.
That man is John Hussman of the Hussman Funds. Why should he be taken seriously? After taking a lot of guff for missing the turn in the stock market in 2009, he has had more recent negative predictions validated by what has become a 10% decrease in the DOW since its peak in early November (17,910).
In light of recent events, it’s his new predictions that are causing a stir. Based on historical drops in the stock market, Hussman has been able to draw parallels between what is happening now to what took place in 1929, 1987, 2000 and 2007.
In all four of those years, technical charts showed a familiar pattern when the bull market hit a peak, drop 10-15% to key support levels, and bounce off support only to fall back to the level where the bounce occurred. In all four of the aforementioned years, the support failed to hold the second time, leading to a massive sell-off. Each time, the market experienced a free-fall drop of at least 40% of the market highs over a period of months.
It’s worth noting that markets experience drops when stocks are over-valued, which is exactly the market environment that exists now. There is usually some general economic unrest to provoke selling, which is also part of the current environment. Based on Hussman’s assessment of where the market is now, the gun has been loaded and everyone is waiting to see if something is going to pull the trigger. While a 50% drop is certainly possible, it could get worse than that.