Hussman Funds’ John Hussman says he’s fully hedging his Strategic Growth Fund, seeing the recent market weakness as a “natural (though unpredictable in timing) clearing of the previously overextended market condition.”

In his latest market commentary, Hussman says it’s not impossible that this clearing phase is over, “but it would be uncharacteristic, particularly since we’ve seen a lot of technical breakdowns, and our broad measures of market internals are negative.”

Hussman has a couple main concerns, including unemployment and a second wave of credit losses, and says his economic outlook is “cautiously pessimistic.”  In terms of unemployment, he says he thinks last month’s drop in the unemployment rate was an anomaly, and he expects the jobless rate to peak in the 11% to 12% range.

He says he expects credit risks “to become more salient as we move through the first quarter, and if that occurs, there may be a perception that the market is being hit by one thing after another. Credit spreads widened again last week, and we’re keeping a keen eye on those, as well as indications of delinquencies and foreclosures, which may become a renewed source of concern.”

Over the longer term, Hussman says he is concerned about inflation. But he says there is “little reason to expect those pressures in the first few years of this decade.” Because of that, he says he’s likely to gradually build up commodity and inflation hedges over time, “as well as inflation protected TIPS to the extent that we observe a widening in real yields.”