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Excerpt from fund manager John Hussman’s weekly essay on the US market:

As of last week, the Market Climate for stocks remained characterized by unusually unfavorable valuations and relatively neutral market action. Market action has provided exceedingly little information in recent weeks, neither clearing the recent overbought condition with a substantial selloff (which would provide information if market internals were to hold up well in the face of weakness in the major indices), nor displaying evidence of robust sponsorship for stocks. Excitement about the stock market has generally been confined to occasional, marginal new highs, but little progress beyond prior peaks...

In bonds, the Market Climate continues to be characterized by unfavorable valuations and moderately unfavorable market action. As Bill Hester points out in his new piece on inflation surprises, there may be some additional upward pressure on forthcoming inflation figures. The other areas of focus remain the U.S. dollar, and credit spreads.

With regard to credit, I continue to monitor spreads like the difference between Moody's AAA yields and BAA yields, the difference between the yield on the Dow 20 bond average (reported in Barrons, though substantial changes should be checked over 2 weeks to rule out periodic data errors) and 10-year Treasury yields, and the difference in yield between 6-month commercial paper and 6-month Treasury bill yields, among others.

At present, we don't observe much pressure on credit spreads or the U.S. dollar. I continue to believe that fresh economic weakness is likely to be heralded by abrupt dollar weakness, abrupt widening of credit spreads, or both. To the extent that we're not seeing that yet, the main short-term focus continues to be the potential for inflation surprises.

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