10 REASONS THE EQUITY RALLY IS OVER
by ilene - December 7th, 2009 9:47 pm
10 REASONS THE EQUITY RALLY IS OVER
Courtesy of The Pragmatic Courtesy
David Rosenberg takes one more stab at explaining why the
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…
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TRANSPORTS CONFIRM THE ECONOMY IS WEAK
by ilene - October 27th, 2009 12:10 pm
TRANSPORTS CONFIRM THE ECONOMY IS WEAK
Courtesy of The Pragmatic Capitalist
Nothing has been more confounding during this equity rally than the weakness in the underlying fundamentals of the transports. Without fail, the data from the transports has been an excellent leading indicator in past recessions. Warren Buffett has even admitted that the rail data is his single favorite indicator to watch. But as equity market have ripped higher, the rails and other transports have lagged.
Of course, as time has passed we have witnessed the enormous influence of government stimulus on the economy and the incredible impact of money printing on asset prices. As we begin to see signs that government stimulus is failing to generate jobs and a sustainable recovery, the transports continue to forecast a very weak recovery. Have the transports been right this whole time or is the Fed’s liquidity induced rally a more accurate reflection of the economy?
Late last week, Union Pacific CEO Jim Young said the economy had stabilized, but was not recovering just yet:
“So, it looks like the economy has bottomed out, but unfortunately we’re not seeing an upturn yet.
The weekly rails data we report has shown certain signs of stability and even a slight uptick of late, but whether this warrants the extreme recovery optimism we hear about on a daily basis is highly suspect:
Of course, the weakness in the transports isn’t just in the rails. The Air Transports reported a 13% year over year decline in cargo just last week and the latest truck tonnage data shows that the recovery in trucking is also very weak:
In terms of market implications, Richard Russell is now growing very concerned about the action in the Transports:
“From a Dow Theory standpoint, the Transports are now worth watching. They’re sort of sinking out of sight on higher volume. And look at MACD which has now turned bearish. Transports could be a problem. And note today’s plunge of over 100 points.”
From a trading perspective, we saw heavy put action in the Transports late last month as they were beginning to top out. Since then, traders have become very concerned about a potential double top leading to further weakness in the transports sector.
The fundamentals seems to rhyme with the technicals. Some traders couldn’t ask for a better set-up….
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site