10 REASONS THE EQUITY RALLY IS OVER
David Rosenberg takes one more stab at explaining why the equity rally is on its last legs.
1. For the time being, the equity market is going to have to contend with more chatter of the Fed’s exit strategy.
2. The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.
3. Market leadership is beginning to fade as seen by the receding advance-decline line on the big board.
4. Market complacency is a worry with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.
5. The WSJ (page C1) reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing too.
6. Volume has declined markedly and has surpassed 4.7 billion shares on the NYSE just once in the past three weeks.
7. With the correlation between a weak greenback and a positive stock market above 90% over the past eight months (versus zero over the past 30 years), a countertrend rally in the U.S. dollar would likely coincide with sputtering equity prices.
8. The Dow transports/utilities ratio has turned in a classic triple-top and this is a signpost to get defensive.
9. The latest Investors Intelligence poll shows the bull camp at 50%; the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective (another sign of complacency).
10. Corporate bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.
While David notes 10 very solid reasons for the market to be under pressure in the coming months I think he fails to note the positive (note that I did not say strong) underlying earnings picture that exists. This rally has not been on solid fundamentals and any signs of real strong economic growth, but rather an improvement in corporate margins that has been completely overlooked by the analyst community. In other words, we remain in a “beat and raise” world. That is unchanged for now and will ultimately be the reason why David’s 10 reasons are wrong and why the unwavering bear will be wrong again about this market top….
Source: Gluskin Sheff
Perhaps the reasons why the market hasn’t topped is because Rosie and others continue to call the top and for double dips. I’m bearish but I’m with TPC on this one.
I don’t think there is fear out there:
Investors Intelligence Bull/Bear Ratio jumped to 2.99 last week, the highest
reading since October 2007. Bullish sentiment fell from 50.6% to 50.0%,
remaining near its late August reading of 51.6%, which was the highest since the
end of 2007. Bearish sentiment dropped for the third straight week to 16.7%, the
fewest bears since June 2003!
everybody expect a correction, but it is normal after a 9 months long rally…
Advisors classified in the correction camp jumped from 31.8% to 33.3% last week, the highest reading since September 1997.Investors Intelligence notes this group
is mostly bullish but they expect an intervening market retreat before the rally begins.
by a contrarian point of view, I think it will be worst than a simple correction…
That seems so stupid though. The underlying fundamentals remain weak, but we will rally or remain high because the analysts are too stupid to figure out what the heck is going on?
The market is an expectations game. If everyone thinks the market is going to go lower then who is going to be there to sell it lower if everyone has positioned themself for that outcome?
If everyone thinks corporate earnings (ultimate driver of future price) are going to be weak (which most do) and they come in stronger (regardless of the underlying strength) then stocks should stay buoyant or higher.
It just seems so stupid that the market could be so dependent on these analysts. Why is that?
They’re the experts. Why do we hire anyone to analyze anything? Why do judges rule on legal proceedings? Why do referees rule on football games? There are experts in everything and they always influence the outcomes heavily.
And this is why I think I’ve become an existential nihilist in the last year….
We close above SPX 1115-1120 and I’m with you. David may be right fundamentally but as you stated this market isn’t working on fundamentals.
I think Credit Suisse has this one just about perfect. We rally H1 of next year on easy money and decent earnings then reality hits in the second half when analysts get way too optimistic and the economy begins to falter again as stimulus ends and the real underlying weakness becomes visible again.
I should also add – of course margin expansion is a good fundamental reason, but we should look under the hood here. Real long-term sustainable earnings growth should be driven by revenues and not cost cuts as we are seeing here. I think revenues will tick higher a bit next year, but not to the extent that it legitimizes the earnings recovery. This margin story is mostly cost cutting and remains so. Fundamental, perhaps, but sustainable? No. Should last at least another quarter, however, as analysts fail to catch on….
I dunno … I work for a company who’s revenue has been flat, flat, flat for a decade. Product remixing w/ acquisitions & divestitures, yes, along with cost cutting, and stock price has done pretty well. Fleckenstein hates it, and it’s puzzled him for, well, about forever…
Hard to argue with TPC, who has been consistently right. Another reason I think for higher upside is that Wells Fargo and Citi need to follow through quickly with TARP repayment, otherwise they are at a competitive disadvantage. I am sure the officials will do their best in being accommodative with a favorable market climate since they are eager to collect the TARP funds and deploy it elsewhere (i.e. job creation). Since every thesis is suspect without at least a counter argument let me offer this concern, namely, that it has been extremely rare for forecasters to project accurately extended periods of slow growth and high unemployment.
TPC said: “This rally has not been on solid fundamentals and any signs of real strong economic growth, but rather an improvement in corporate margins that has been completely overlooked by the analyst community. That is unchanged for now and will ultimately be the reason why David’s 10 reasons are wrong and why the unwavering bear will be wrong again about this market top….”
I guess you did not read point #2: The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.
In fact, it proves my point. David’s earning estimates remain quite low for 2009 and 2010. He implies that unit labor costs will rise because employment is improving, but that is not necessarily true. As we saw in the Challenger employment report last week there is still very little hiring. In other words, firms are not spending oodles of money on workers. This leaves the margin story well intact heading into the next quarter and analysts (Rosenberg included) are not properly accounting for it in their estimates. This doesn’t mean it will last forever, but I certainly see the margin story lasting another quarter.
As I often say, Rosenberg’s macro outlook is generally correct, but his timing is also generally poor.
I fail to understand how David proves your point.
David says “margin expansion is behind us.” You think its going to continue. One of you is wrong.
IMHO margin expansion is near the end or is possibly over, its definitely decelerating. While I believe labor will remain weak other input costs have risen substantially over the past year, just take a look at commodities.
#3 is factually incorrect. I have the NYSE Advance/Decline breaking out to new rally highs as of today’s close.
Well…. if we rally, will Rosie eat crow?
no, he will talk about how he just turned bullish on commodities and gold. Rosenberg is kind of becoming a joke. Synonymous with “wrong”.
In Rosenberg’s defense – he was quite bullish on oil, gold and commodities earlier this year. I have several quotes from him about oil at $30 and gold in the $700′s when he was bullish. Admittedly, he has been very bearish on stocks, however, throughout the rally.
TPC,
Fed will not raise 1H of ’10. Stimulus II will be very large and will keep this going into next year once they realize the blips were caused by Stimulus I and cannot be repeated.
Dollar will gyrate but general direction should be down.
Invest accordingly. IMHO. Still waiting for your opinion on the rare earth sector. Peace brother.
a broken clock is right twice a day…
TPC,
from your friends at SA:
http://seekingalpha.com/article/177009-economic-indicators-suggest-investing-caution?source=hp_wc
So you say that the the equity rally is over. How long do you actually think this kind of trend will last and if so how low will the market fall? In my opinion I think the markets will be mixed however strong sectors and strong stocks will still continue to flourish.
TPC,
You may prove to be right, but David right now has as much chance for the present. As has been noted before , great rallies often end on good news. Right now it is beginning to appear that the market may unravel one thread at a time, with none of those threads actually being the cause. First CIT, then Am Fin and Dubai, and now a small dollar rally. If this continues , this market will die slowly from numerous small incidents whose cumulative effects are what matters. Also look at events all over the world hitting the financial markets: Greece and the PIGS group have their problems. Germany is down on industrial production for the first time in many years. I think the list is quite likely to continue to grow slowly until we reach that proverbial straw, which I see coming before the end of Q12010.
Bill,
As you know, I am well aware of the problems out there. I just have a very hard time believing that the market will unravel when the earnings picture remains quite positive. This doesn’t mean we can’t correct and undergo downturns, but are we about to tank to -20% bear market levels? I would say there is very little chance. But hey, I’ve been very wrong before….
proverbial straw might be bombs on iran.hope not,but i with rosie don’t see way around it.
fly fishing in keys as i type this