The next Federal Open Market Committee (FOMC) meeting starts tomorrow, and after the recent market turbulence investors will be waiting to find out if they’re going to get more QE or if asset prices finally have to stand on their own. John Hussman isn’t willing to guess what will happen in the next few days or weeks, but he warns investors not to get too complacent because previous market crashes have happened in fits and starts, not in a sudden vertical dive.

“It’s important to remember that, as in 2000 and 2008, even when we identify market conditions as extremely hostile, short-term action can be something of a coin flip,” he writes. “In some cases, the market can fall to a very oversold short-term low, and then the bottom completely falls out in a vertical decline… In other cases, short-term oversold conditions are “cleared” by what we’ve long called ‘fast, furious, prone-to-failure’ advances.”

Similar patterns seen in previous crashes

John Hussman made the exact same argument in 2000 and 2008 (and has the links to prove it), because he was confident that valuations had detached from fundamentals and it was only a matter of time before the market underwent a severe correction. The problem, at least in the near term, is that the market can enter a short-term oversold position and then rebound on low volume as investors ‘buy the dip’ and hope to profit from what they believe is an inevitable bounce. The difference in trade volumes, according to Hussman, is a big tip off that something is wrong.

While he was around to call it in 2000 and 2008, John Hussman sees the same dynamic at play in 1929, 1972, and 1987 as well. In each of these examples there were smaller drops and advances before the big crash as volatility increased and confidence became stretched.

John Hussman 1987 2000

John Hussman 1929 1972

John Hussman 2007 2014

John Hussman calls a 50% drop ‘plausible’

As he’s said before, John Hussman views current market conditions and risk/rewards as among the worst in US history and a 40% – 50% won’t surprise him, but he knows better than to guess an exact date, or to bet against the Fed. If Fed chair Janet Yellen decides to keep QE going a little longer, the market will be ecstatic. But that doesn’t mean Hussman or other critics of QE will be any less bearish on how this market cycle is going to end.