Market Climate

...from John Hussman's weekly commentary -

Market Climate

As of last week, the Market Climate for stocks was characterized by rich valuations, unfavorable economic pressures, and elevated though not extreme bullish sentiment (the Investors Intelligence figures are 41.7% bulls vs. 27.5% bears). We also observed an abrupt and somewhat surprising amount of technical damage last week. That damage is not quite to the level that would create urgent downside concerns, but as I noted last week, the deterioration could be very abrupt if the economic data continue to come in weaker than expected. We are fully hedged in the Strategic Growth Fund. Given the repeated tendency for investors to "buy the dips" on the false perception that stocks are cheap (primarily on the "forward operating earnings" argument that we've analyzed in recent weeks), we may see a "fast, furious, prone-to-failure" advance to clear the short-term oversold conditions we developed last week. Still, caution is important here, since we're in a set of conditions where one or two hard down days can wipe out weeks of choppy upside progress.

In bonds, the Market Climate remained characterized last week by unfavorable yield levels and favorable yield pressures. Over the near term, perceptions of economic risk are clearly dominant, and given the tendency for the Treasury yield curve to flatten during periods of economic weakness, we may see long-term Treasury yields pressed even lower for a while. At the same time, however, increased risk perceptions could hit corporate bonds very hard even in a softening economic environment. While corporate cash levels may very well reduce liquidity risk for companies that would otherwise need to raise funds in a tight credit market, investors should not ignore that the overall debt burden of U.S. corporations is higher than it has ever been.