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To: ild who wrote (257512)	8/24/2003 11:39:28 PM
From: ild	Respond to of 436258

Hussman: The Market Climate for stocks remains characterized by unfavorable valuations and moderately favorable trend uniformity. Last week, the Dow Industrials and Transports actually cleared the non-confirmation they've displayed lately, by rising to joint new highs. That is a constructive development, and while we wouldn't increase our exposure to market risk at present levels, a well-behaved decline would create an opportunity to modestly increase our exposure. At present, our exposure to market risk is likely to fluctuate between about 40% on the low side to 70% on the high side, depending on the condition of trend uniformity that we observe at any particular point in time. That brings up a subtle point - our identification of trend uniformity is very discrete: favorable or unfavorable. But within each status, trend uniformity can range from tenuous and weak to extremely strong. In some cases those details matter, and in other cases they do not. When both valuations and trend uniformity are unfavorable, that's all we need to know to establish a full hedge against market fluctuations. It does not matter how weakly or strongly negative trend uniformity might be. In contrast, when valuations are unfavorable and trend uniformity is favorable, our discipline requires us to accept some amount of market risk, but the extent to which we do so is determined by how strong or weak the status of valuation and trend uniformity is at any point. Again, at present, that extent is likely to fluctuate between about 40%-70%. Currently, we're near the low side of that range, but a well-behaved decline may change that. Well-behaved essentially means a market decline that does not extend existing divergences or create new ones. For example, a decline in which the major averages retreat, but financials, utilities, retails, or some other sector goes into free fall, is not a well-behaved decline. Nor is a decline in which the number of new lows suddenly explodes on high trading volume. Nor is a decline in which risk spreads between corporate and Treasury yields suddenly widen markedly. Suffice it to say that there are a great many ways in which the market can decline while also behaving badly. Bad behavior conveys negative information. In contrast, well-behaved declines during periods of favorable trend uniformity tend to be good opportunities to increase our exposure to market risk. We'll see. In bonds, the Market Climate continues to be characterized by modestly favorable valuations and modestly favorable trend uniformity. If trend uniformity was simply a measure of obvious trends in interest rates, one might be prompted to ask what kind of psychedelic mushroom would lead us to grade those trends as favorable. But as I've frequently noted, trend uniformity doesn't measure the extent or duration of any particular market movement, but instead measures its quality. Bond yields have certainly moved higher in recent months. But while the move has been very rapid, it has also been impressively well-behaved on the measures that we use. So we take the surge in yields as a signal of better valuation rather than deteriorating conditions for the bond market, and we've acted accordingly. Our position in the Hussman Strategic Total Return Fund remains fairly restrained, but we established some exposure to long-term Treasuries near the recent lows. The Fund continues to have a portfolio duration of less than 7 years. hussman.com