3 of 5 recovery signs in place
D. Pett, Financial Post
With North American markets down more than 50% from their peaks, talk this week has turned again to the possibility that stocks are ready to rebound.
On Tuesday, Barack Obama, the U. S. President, declared that stock markets have bottomed and as indexes bounced on Wednesday, market analysts the world over jumped into the discussion, claiming a "bear market rally" was under way.
But based on yesterday's broad-based retreat that saw Canada's top exchange fall almost 200 points and the Dow Jones Industrial Average and S&P 500 both drop more than 4%, prognosticators may have spoken too soon.
In fact a report from Credit Suisse this week claims a recovery, even in the short term, appears unlikely until certain conditions are in place.
"All in all, three of the five preconditions for a bear market rally are in place," said U. K.-based analyst Andrew Garthwaite in a note to clients. "Ultimately, however, we believe all five preconditions are needed."
The first building block to a bear market rally that appears to be in place is the presence of high cash levels sitting on the sidelines. Mr. Garthwaite noted that U. S. money market mutual funds are worth roughly US$4-trillion currently and account for 40% of total market capitalization. And for the first time since 1993, they represent a greater value than U. S. equity mutual funds.
Second, the analyst is encouraged by a turnaround in the best U.S. lead indicators.
Third, credit spreads appear to be stabilizing and improving, with corporate bond issues picking up over the past few months.
Holding back the bear market rally, on the other hand, is the pending peak in U. S. housing inventories and the all-important point of investor capitulation.
Mr. Garthwaite says existing home inventories will likely peak in the second quarter.
As for investors reaching a capitulation point, Mr. Garthwaite says technical indicators remain mixed. NYSE stocks trading above their 10-week average seems to have capitulated, the analyst says, while the VIX index, a measure of market volatility, earnings breadth and market breadth all indicate a lower level of stress than three months ago.
Equity risk appetite, equity sentiment and insider buying, three other key indicators, have not capitulated, however.
Despite Mr. Garthwaite's belief that a bear-market rally is not imminent until all of the preconditions mentioned are satisfied, he remains confident that governments and corporations have the right policies in place to help turn markets before they get much worse.
"We are reluctant to be negative on equities when the market is more oversold than at any time in the last 70 years and has experienced the biggest peak-to-trough decline since the Depression (in real and nominal terms)," he said
"While the outlook for GDP growth is the worst it has been since the 1930s, this does not mean the equity market has to be as cheap as it was in the 1930s
D. Pett, Financial Post
With North American markets down more than 50% from their peaks, talk this week has turned again to the possibility that stocks are ready to rebound.
On Tuesday, Barack Obama, the U. S. President, declared that stock markets have bottomed and as indexes bounced on Wednesday, market analysts the world over jumped into the discussion, claiming a "bear market rally" was under way.
But based on yesterday's broad-based retreat that saw Canada's top exchange fall almost 200 points and the Dow Jones Industrial Average and S&P 500 both drop more than 4%, prognosticators may have spoken too soon.
In fact a report from Credit Suisse this week claims a recovery, even in the short term, appears unlikely until certain conditions are in place.
"All in all, three of the five preconditions for a bear market rally are in place," said U. K.-based analyst Andrew Garthwaite in a note to clients. "Ultimately, however, we believe all five preconditions are needed."
The first building block to a bear market rally that appears to be in place is the presence of high cash levels sitting on the sidelines. Mr. Garthwaite noted that U. S. money market mutual funds are worth roughly US$4-trillion currently and account for 40% of total market capitalization. And for the first time since 1993, they represent a greater value than U. S. equity mutual funds.
Second, the analyst is encouraged by a turnaround in the best U.S. lead indicators.
Third, credit spreads appear to be stabilizing and improving, with corporate bond issues picking up over the past few months.
Holding back the bear market rally, on the other hand, is the pending peak in U. S. housing inventories and the all-important point of investor capitulation.
Mr. Garthwaite says existing home inventories will likely peak in the second quarter.
As for investors reaching a capitulation point, Mr. Garthwaite says technical indicators remain mixed. NYSE stocks trading above their 10-week average seems to have capitulated, the analyst says, while the VIX index, a measure of market volatility, earnings breadth and market breadth all indicate a lower level of stress than three months ago.
Equity risk appetite, equity sentiment and insider buying, three other key indicators, have not capitulated, however.
Despite Mr. Garthwaite's belief that a bear-market rally is not imminent until all of the preconditions mentioned are satisfied, he remains confident that governments and corporations have the right policies in place to help turn markets before they get much worse.
"We are reluctant to be negative on equities when the market is more oversold than at any time in the last 70 years and has experienced the biggest peak-to-trough decline since the Depression (in real and nominal terms)," he said
"While the outlook for GDP growth is the worst it has been since the 1930s, this does not mean the equity market has to be as cheap as it was in the 1930s
1 comment:
The recession has just begun.
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