This article is a guest contribution by David Rosenberg, Chief Market Economist, Gluskin Sheff.
MARKET COMMENT
A whole 1 point decline in the S&P 500 and for the bears it was like winning in extra innings after a three-week losing streak (and in contrast to the rally days, volume on the NYSE expanded 10% yesterday). We received all sorts of emails yesterday that Barton Biggs had reloaded the gun and moved from 50% to a 75% weighting in equities. Maybe that was the kiss of death. Maybe we have again stalled out around the 200-day moving average. Or maybe the market is simply the most overbought it has been in nearly three months, according to some oscillators.
Perhaps, like Barton, everyone has gone long the market again and we recall a survey that we saw over the weekend that PM’s are now 68% weighted in equities in their balanced funds. We can also see from the CFTC data that the net speculative position (futures and options) at the Merc has swung from a net short position of 40,000 contracts in mid-June to a net long position of 3,300 contracts currently. That sort of move will certainly move the needle. Ditto for the 1.2% decline in NYSE short interest over the past month. In the past two weeks, Market Vane bullish sentiment on equities has moved up 5 points. It’s all good. Meanwhile, consumer confidence has rolled back to a five-month low (what does Main Street know, anyway?).
Earnings on the surface seem to be doing just fine but at the same time, we can see that the economy slowed visibly as Q2 came to a close and the July data are telling us to expect a slightly different tone to Q3 guidance. There was a nifty article on Market News yesterday showing how 82% of the corporate universe beating EPS estimates is standard fare and that only 68% are doing so in terms of revenues (a figure lower than we saw in the second quarter of 2008 when the economy was knee-deep in recession). Sales are up the grand total of 9% YoY and this being compounded off a -14% trend this time last year – so margins continue to stretch out to the limits and one has to wonder how long that is going to last. Who knows? Maybe profits end up going to 100% of national income and labour’s share totally vanishes.
I was asked yesterday in an interview how I respond to criticism for missing the surge in the equity market. Well, for one thing, those that were long in 2009 got their clients killed in 2008 and it’s still not even a wash. Second, I was recommending credit and commodities last year, not cash, and these strategies played out well. There are always ways to make money without having to go whole hog into the stock market (if you think I’m bearish, there are others who make me look like Jim Carrey – have a read of “Doomsday Shelters Making a Comeback” on page 3A of the USA Today).
More to the point – we can get 80% rallies in a secular bear phase, and to be totally honest, I have never billed myself as a market timer. There are others here at GS+A that do that much better than me. The Nikkei has enjoyed 260,000 rally points in the past twenty years and the market is still down 70%. If you partake of these bear market rallies, know when to get out – or at least sell call options and collect the premium. It is amazing how people are still stuck in this belief that the 80% rally off the lows is still somehow a prevailing market condition – the S&P 500 peaked on April 26th and even with the recovery of the past few weeks, the S&P 500 at 1113, with all due respect, is no higher now than it was on November 16th of last year.
