Hussman Weekly Commentary: Tornado Warnings

Hussman Funds - Weekly Market Comment: July 17, 2006 - Tornado Warnings:

"In short, until we observe an improvement in the quality of internal market action (which we don't observe here) we shouldn't be surprised to see news - economic as well as political - having a generally negative tone.

For example, since the 1960's, when our measures of market action have been favorable on balance, the ISM purchasing managers index has increased an average of +0.46% over the following month. In contrast, when market action has been unfavorable, the index has declined an average of -0.68% over the following month. Likewise, surprises to the prevailing inflation rate have averaged -0.23% when market action has been favorable, and +0.30% when market action has been favorable. Similar results hold even if we lag the news by an extra month to ensure non-overlapping periods.

We also know that news affects sentiment measures such as consumer confidence and the percentage of bearish investment advisors. These measures give us "summary statistics" of the various concerns influencing consumers and investors in a given month. Historically, when internal market action has been favorable, consumer confidence has increased by +0.64% over the following month, while unfavorable market action has been followed by an average decline of -0.84% in consumer confidence. Similarly, favorable market action has been followed by a contraction in the bearish percentage by -0.38% during the following month, while unfavorable market action has been followed by an average increase in the bearish percentage by +0.46%. Again, similar results hold even if we lag the data."