Market Climate
As of last week, the Market Climate for stocks was characterized by unfavorable valuations and mixed market action, coupled with still-negative economic pressures overall. From a technical standpoint, the market is displaying a specific set of trends and divergences that has often been associated with "whipsaw" reversals. Internal dispersion is increasing, which can be observed, for example in the relatively high number of stocks establishing both 52-week highs and 52-week lows. When this sort of dispersion is coupled with overvaluation and negative economic pressures (which we also observed, for example, in Nov 1973, June 1990, Nov 2000 and June 2008), the subsequent outcomes have often been quite awful. Once those conditions are all in place, one indication of immediate risk is a "leadership reversal" where the number of new lows predominates following a week where new highs predominate (though you sometimes see a couple of these events a few weeks apart near market peaks if prices are whipping around).
A leadership reversal here could be followed by a lot of damage, particularly if a break of the repeatedly-tested 1040 area on the S&P 500 was to prompt selling pressure by the technical crowd. Barring such a reversal, the market appears likely to whipsaw back and forth within the trading range the market has established in recent months. Again, the best description of market action here is "mixed." The Strategic Growth Fund remains fully hedged here.
In bonds, the Market Climate remained characterized last week by moderately unfavorable yield levels and favorable yield pressures. The Strategic Total Return Fund continues to carry a duration of slightly over 4 years, mostly in straight Treasury securities. As noted above, the Strategic Total Return Fund also holds a moderate position in precious metals shares, representing about 10% of assets, with about 5% of assets in foreign currencies. Approximately 2% of assets are invested in utility shares.
In my view, bonds are further into the "recognition window" than stocks are, as bond market action is increasingly contemplating downside risks to the economy as well as further policy actions by the Federal Reserve. To the extent that analysts and investors still doubt and debate economic risks, it appears unlikely that these risks are fully reflected in bond prices, and to that extent, it also appears unlikely that positive economic surprises will significantly shake the bond market. In contrast, at the point where worsening economic activity is well-recognized, there may be little prospective return and substantially greater risk in holding longer maturity Treasuries.
Last week, we opened the Hussman Strategic International Equity Fund (HSIEX) to new shareholder investments. We're confident that the new Fund will help to address the existing need for risk-managed mutual funds in the international markets. Probably the best description of Strategic International Equity is that it is intended to be a risk-managed international fund - essentially an international version of Strategic Growth, based on largely the same stock selection and hedging approach. The inception of the Fund was actually December 31, 2009. Over the past several months, we have established and tested brokerage, clearing, accounting, custody and other functions of the Fund. I will be managing the Strategic International Equity Fund with Bill Hester as the co-portfolio manager.
I should note that since we incurred all of the normal fixed costs of a Fund during the past several months with a small capital base, you'll see a somewhat out-of-whack 5% "gross" expense ratio and a 2% "net" expense ratio in the financial report covering the first 6 months of this year. In practice, the expense ratio is capped at 2% through 2012, but as with the other Hussman Funds our expectation is to reduce the expense ratio promptly in response to asset growth. See the Prospectus for more detail on risks and expenses.
The Hussman Funds don't run advertisements, we don't have sales reps, we don't charge 12-b(1) fees, and we don't launch our Funds with press releases and dog-and-pony shows. We don't want the Funds to be "sold" to anybody. Instead, what we prefer is that investors read each prospectus carefully (see The Funds page), read the financial reports, examine the portfolio holdings, track Fund performance, read the weekly commentaries, and understand our investment strategy before investing. As with Strategic Growth and Strategic Total Return, Strategic International Equity is intended to outperform its benchmark (the EAFE) over the complete market cycle (bull market plus bear market) with smaller periodic losses than a passive "buy and hold" approach. However, the Fund is inappropriate for investors who wish to closely track market fluctuations or have short-term (rather than full-cycle) investment horizons. On the subject of portfolio allocation, we don't advise any specific mix of Funds, because the situation of each investor is different. Still, just as a "standard" allocation for U.S. stocks, bonds and international equities is typically 50-60%, 20-30%, and 10-20%, respectively, our view is that the same range of allocations is probably reasonable as a "standard" portfolio mix for the risk-managed portion of investors' portfolios.
Copyright (c) Hussman Funds
