John Hussman has another excellent column this week that is a must read for investors. Short-term traders, especially day traders, need not bother. Everyone else could use a refresher course in risk management.



Please consider Warning - An Updated Who's Who of Awful Times to Invest

In recent weeks, the U.S. stock market has been characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically been hostile to stocks. Last week, the situation became much more pointed. Past instances have been associated with such uniformly negative outcomes that the current situation has to be accompanied by the word "warning."



The following set of conditions is one way to capture the basic "overvalued, overbought, overbullish, rising-yields" syndrome:



1) S&P 500 more than 8% above its 52 week (exponential) average

2) S&P 500 more than 50% above its 4-year low

3) Shiller P/E greater than 18

4) 10-year Treasury yield higher than 6 months earlier

5) Advisory bullishness > 47%, with bearishness < 27%

From our standpoint, the return/risk profile of the equity market is the most negative that we ever observe historically, so we are willing to speculate neither on the hope for government wisdom, nor on the hope for government recklessness. Investors who are convinced that monetary and fiscal actions will drive the market ever higher can easily offset our hedges by establishing exposure to the S&P 500 or more speculative alternatives. What I can't do on behalf of those investors is violate our discipline and take a speculative exposure in an environment where the historical evidence indicates an extraordinarily hostile return-to-risk tradeoff.



Still, it would be an understatement to say this has been an unusual cycle. Given the broader set of Market Climates we have defined, I am confident that we will periodically observe more favorable market environments - possibly even in the coming months, without major changes in market valuation - where we will be able to accept risk in the expectation of positive returns. From my perspective, this is emphatically not one of them.



The last thing we want is to be inadequately hedged in an indiscriminate selloff because we believed our stocks did not have much "beta."



Catching Every Rally Is Easy

Diversification No Savior

Rallies Very Enticing