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From Dr. John Hussman's weekly market comment for March 9, 2009:

I suspect that the markets are about to get volatile, possibly to an extent beyond what we observed in October and November. As long-term shareholders know, we don't invest on forecasts, but on the basis of observable measures of valuation and market action. Not surprisingly, we are positioned in a way that can accommodate a strong advance as well as profound weakness. Overall, however, our investment stance has to be characterized as defensive.

As always, we have the ability to accept risk by holding a portfolio of stocks having a different composition than the indices we use to hedge. The difference in performance between our stocks and those indices has been the primary driver of the returns in the Strategic Growth Fund since its inception. We can certainly accept those risks that we expect to be compensated over time, while still hedging against general market fluctuations. As for the stock market as a whole, I continue to view the market as undervalued, but not deeply undervalued. So over the course of a 7-10 year holding period, I do expect passive buy-and-hold investors in the S&P 500 to achieve total returns somewhat above 10% annually. Shorter-term, however, investors may demand much higher prospective long-term returns in order to accept risk, and that's a problem, because the only way to price stocks to deliver higher long-term returns is to drive prices lower.

While the stock market is extremely compressed, which invites the typical “fast, furious, prone-to-failure” rallies to clear this condition, my larger concern is that market action and credit spreads are demonstrating very little investor confidence, risk-tolerance or commitment to stocks. Value investors know that stocks have been much cheaper at the end of lesser crises, and traders are still sellers on advances. My impression is that only prices that allow no room for error (what Ben Graham used to call a “margin of safety”) will be sufficient to prompt robust, committed buying from value investors. This will be a fine thing for investors who keep their heads, are already defensive, and have the capacity to add to their investment exposure on price weakness, but other investors are likely to be shaken out of long-term investments at awful prices. This need not happen in one fell swoop, and we need not observe the “final lows” anytime soon. The problem is that even to get a sustainable “bear market rally,” somebody has to be convinced that stocks are desirable holdings for more than a quick bounce.