Hostile Trends

Hussman Funds - Weekly Market Comment: April 24, 2006 - Hostile Trends: "Historically, the worst outcomes for stocks have typically emerged when valuations were rich and there were well-defined upward pressures on interest rates and other yields. The tendency for bad outcomes to be born of such conditions is so established that our investment discipline virtually demands that we hedge when they are present.
At the same time, the elements just mentioned virtually assure that a defensive position will look ridiculous for some amount of time. Specifically, rich valuations imply that the market will typically have done well in recent months or years, and that it will probably still be establishing marginal new highs (until, of course, it doesn't). Likewise, upward pressures on interest rates and other yields typically imply concurrent economic strength and strong consumer confidence. So at the most compelling times to hedge risk, the market will be achieving fresh highs and the economy will appear strong. Hedging under those conditions is often accompanied by foregone short-term gains that are made irrelevant by subsequent market weakness.
Conversely, the best outcomes for stocks have typically been born of depressed valuations and well-defined downward pressures on interest rates and other yields. This combination typically emerges after stocks have done terribly in recent months or years, and are still probably establishing fresh lows, while the economy appears unusually weak and consumer confidence is plunging. Aggressive investment under those conditions is often accompanied by disappointing short-term losses that are made irrelevant by subsequent market strength.
The upshot is that the points where defensive or aggressive investment positions are most effective are also typically the points where one will, at least briefly, look like an idiot for taking t"