Fund manager John Hussman says the current stock market condition “warrants unusual concern,” and is playing defense with his portfolio.

“Based on a wide variety of evidence and its typical market implications over an ensemble of dozens of subsets of historical data, the expected return/risk profile of the stock market has shifted to hard-negative,” Hussman writes in his weekly market commentary. “This places us in a tightly defensive position.” Hussman says conditions could change rather quickly, but right now he sees “conditions that have often produced abrupt crash-like plunges. This combination of evidence includes elevated valuations, overbullish sentiment, market internals best characterized as a ‘whipsaw trap’ on the basis of typical follow-through, heightened credit strains, and clear evidence (on reliable forward-looking indicators) of oncoming recession, among other factors.”

Hussman estimates that based on current valuations, the S&P 500 is priced to return about 4.8% annually for the next decade. He says they may very well beat Treasury bonds over that period, “but for investors who have any sensitivity to price volatility, that is likely to be a small comfort in the next few years.”

As for Europe’s debt crisis, Hussman thinks recent optimism is overdone. “Last week’s events took a great deal more off the table than sugar-addicted investors may immediately appreciate,” he says. “In effect, if a fiscal union is achieved without treaty changes, the ECB is unlikely to act. But even if treaty changes are achieved, the ECB is unlikely to act forcefully unless those changes are credible. Of course, if the changes are credible, then forceful actions will not be needed anyway. In any event, the problem for bailout-hungry investors is that they will be deeply disappointed if they expect Mario Draghi to turn into Ben Bernanke.”

Hussman also gives his take on what might help Europe, and why he’s not positioning his portfolios to catch a “Santa Claus Rally”.