The following is an excerpt from the weekly market commentary of John Hussman, president of the Hussman Trust. For the full outlook, plus archives of Mr. Hussman's commentary, click here.
As of last week, the Market Climate for stocks was characterized by unfavorable valuations, generally favorable trend action, weak price-volume sponsorship, strongly overbought conditions, moderate but not yet over-bullish sentiment, and hostile economic pressures. Overall, this is not a favorable set of conditions in terms of the expected return/risk profile for the market, but urgent downside concerns would require more internal damage than we have at present. Over the short-term, the market appears likely to be driven by speculative considerations such as whether the S&P 500 crosses above or below some technical support or resistance level. This is clearly the most prevalent "game" that investors are playing at present, but that game is likely to end abruptly if we observe further deterioration in new unemployment claims, ISM data and other coincident measures.
As I noted last week, the deterioration we've seen in various leading economic composites would be consistent with a sharp deterioration in the ISM figures for August and September, as well as a spike in new unemployment claims closer to the September - October time frame. Last week's jump in claims was still a bit "early" from the standpoint of typical lag times, so I'll actually be somewhat surprised if the data continue to deteriorate right away. Still, the overall weight of the data suggests a much greater likelihood of economic weakness than investors seem to be anticipating. If we don't observe clear weakness in the economic data in the next couple of months, we'll clearly move with the data toward a more constructive economic outlook - particularly if the leading measures improve as well. For now, however, regardless of very short-term speculative factors, I view the present window as a very dangerous one. The Strategic Growth Fund remains fully hedged.
In bonds, the Market Climate remained characterized last week by moderately unfavorable yield levels and favorable yield pressures. The Strategic Total Return Fund has a duration of about 4 years, mostly in intermediate term, straight Treasury notes. Meanwhile, despite long-term inflationary implications of our fiscal imbalances, disinflationary pressures are likely to remain strong for a while. Dollar weakness is providing some good support for commodities here, but credit concerns would reverse that support quickly, so anyone speculating in commodities here had better pay very close attention to credit spreads and be ready to cut losses quickly. For our part, we prefer more durable investment opportunities, which I would expect some time after we observe weakness in coincident economic measures.
