The following is an excerpt from the market commentary of John Hussman, president of the Hussman Investment Trust, for the week of Sept. 27, 2010. For more of his commentary, please visit Mr. Hussman's archives.
Presently, our valuations measures suggest clear overvaluation (our estimated 10-year total return for the S&P 500, based on a variety of models including the operating earnings model presented a few weeks ago, is only about 5%-5.4% annually), market action is strenuously overbought, market internals are relatively positive, but economic pressures are still negative, and sentiment is once again bullish enough to define an "overvalued, overbought, overbullish" condition.
The Strategic Growth Fund is fully hedged at present, and currently has a "staggered strike" position, where our put option strikes are raised closer to the level of the market (at a cost of just over 1% of assets) to provide tighter downside defense. On Friday's advance, our stocks did not participate as much as we would have liked (coming off of a very good relative performance on Thursday), so the Fund pulled back a fraction of a percent. As usual, the day-to-day fluctuations in the Fund when we are hedged are primarily driven by the difference in performance between the stocks we hold long and the indices we use to hedge. The Strategic International Fund is also over 90% hedged, with the precise figure varying modestly from day-to-day as we execute new stock purchases and associated hedges. Suffice it to say that both Funds are defensive here.
As a sidenote in reponse to a few questions last week, since our precise hedge level may vary from day-to-day and week-to-week, I may describe our hedge position with words such as "fully," "largely," "tightly," "nearly fully" and so forth, which really convey little distinction. At the point where it becomes appropriate to remove large portions of our hedges, I will be very clear about our change in position and the rationale for that change. I don't anticipate such major hedging changes until we observe a clear shift in some combination of valuation, overbought conditions, or economic pressures.
In bonds, the Market Climate continues to be characterized by moderately unfavorable yield levels and favorable (i.e. downward) yield pressures. The Federal Reserve continues to telegraph a willingness to engage in further quantitative easing, which suggests the prospect of further Treasury purchases in the event of economic weakness. We're observing clear pressure on the U.S. dollar in response to suggestions about QE, which is as expected. The Strategic Total Return Fund currently has a duration of just over 4 years, primarily in straight Treasury notes, about 10% of assets in precious metals shares, about 5% of assets in foreign currencies (primarily Japanese yen, Swiss franc, and British pound), and about 2% of assets in utility shares.)