Hussman's short term outlook

There hasn't been any meaningful pullback for 12 months now. Euphoria is leading the markets higher and higher, and the slightest 1% decline sees a lot of 'buy-the-deep' players. Junk is soaring more than high quality (Russell 2000 versus the Dow Jones Industrial). Call Put Ratio is a new lows since 2007.

Banks and hedge funds are back in business as usual, which worries me even more than anything. Hiring is going on like crazy, I've seen so many people get poached for big salaries, and receive so many phone calls from head hunters that I feel like I'm back in mid-2007...

Let's get our dose of reality, otherwise there wouldn't be any reason to call this blog Reality Lenses ;-) Here's a brief quote from Hussman's latest weekly commentary:

The Strategic Growth Fund is fully hedged at present, and would be even on the basis of current valuations and yield pressures alone. We now have our put options in a "staggered strike" configuration, which essentially uses about 1% of assets to raise the strike prices of our protective index puts. This is the most defensive position the Fund has held since the 2007 peak. Importantly, the added risk of this position, relative to that of a "plain vanilla" fully-hedged stance, is only about 1% in option premium. As always, the primary risk when we are fully hedged is the potential for our stocks to behave differently than the indices we use to hedge (this difference has also driven the bulk of the Fund's returns since its inception). Given that we currently observe conditions that have previously been followed by market declines of 10% or more within a period of several weeks, I view a very tight defense as important, but I don't expect that we will maintain this level of defense for a significant length of time. We are not relying on a decline, but we certainly are defending against the potential.

As I've noted before, getting past the window of the next few months will relieve a great deal of the "two data sets" uncertainty that we have faced recently. We are far less concerned about the possibility of marginal new highs in the indices over the near-term than we are about the likelihood of unsatisfactory long-term returns, and the potential for an abrupt "air pocket" based on valuations, overbought conditions, and yield pressures, not to mention the very palpable risk to the "all clear" thesis that investors not only take for granted, but have now priced stocks to depend on.

As of last week, the Market Climate for stocks was characterized by now strenuous overvaluation, strenuous overbought conditions, and hostile yield pressures. Under those conditions, even positive market breadth has not typically been sufficient to produce positive market returns, on average.