The call for this week: I think weāve gone from double-dip to double-drip as while the economy is slowing, a slide back into recession is unlikely. I also think the deflation theme has been deflated. Meanwhile, last week the Labor Day Indicator sounded the āall clearā signal when the SPX closed higher over the four days following the holiday. That rally took the SPX above its recent reaction high of 1105 and left it in position to challenge its 200-day moving average (DMA) at 1115. My sense is it will stall around that level and try to sell down. However, I donāt think the selling will gain much traction, leading to a re-rally that will eventually allow the SPX to break out above its early August highs of 1130. Thus, unless the SPX violates its 50-DMA of 1085, followed by a break of 1060, I think the path of least resistance for stocks remains up. Still, investors continue to shun stocks, which has left the Equity Risk Premium (ERP) exceptionally large, as can be seen in the attendant chart. Indeed, āSomethingās Gotta Give!ā
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āLong-term duration asset prices are supposed to tell us something about long-term expectations. Recently, long-term government interest rates have reached new historical lows, and equity earnings yields have remained close to the very high end of their historical range. As a result, the equity risk premium (ERP), at nearly 10% has retested its extremely high level of early 2009. We thus face a striking paradox: investors prefer lending money to heavily indebted governments rather than to the prosperous, resilient and well-managed listed corporate sector. But the corporate sector is on a prosperous streak, with a constrained cost base and decent margins, and thus producing good earnings yields. Is this because equity markets are perceived as more dangerous than ever because of their super low risk/reward profile of the last decade?ā
...GaveKal
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Copyright (c) Jeffrey Saut, Raymond James
