It Wasn’t a Crash – But it Could Become One
A Reminder by John Hussman
In light of the Nikkei Index soaring by more than 1,300 points (!) overnight – a single day gain of 7.7% – it is time to briefly review the current market situation. As to the Nikkei, we would note two things: 1. it was “catching up” to what other markets have been doing, after having been the only stock market index that was significantly down the previous day (whereas all other markets soared after the close of trading in Japan) and 2. such enormous volatility – regardless of its direction – is usually not a bullish sign. Quite the contrary, in fact.
The Nikkei jumps by 1,343 points overnight – click to enlarge.
In his weekly market comment, John Hussman tries to defuse the hysteria surrounding the recent market break a bit, by reminding everybody that a 10% correction is not a “crash”, but actually a quite normal occurrence. The only reason why it felt abnormal was that there hasn’t been any market volatility for such a long time. It is this long absence of market volatility that was abnormal, not the 10% decline. He writes:
“The market decline of recent weeks was not a crash. It was merely an air-pocket. It was probably just a start. Such air pockets are typical when overvalued, overbought, overbullish conditions are joined by deterioration in market internals, as we’ve observed in recent months. They are the downside of the “unpleasant skew” that typically results from that combination – a series of small but persistent marginal new highs, followed by an abrupt vertical decline that erases weeks or months of gains within a handful of sessions (see Air Pockets, Free-Falls, and Crashes).
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