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Wednesday, 8 April 2009
Will The Rally Continue?
Who’s tossing cold water on the rally? A few folks, including Merrill Lynch and Morgan Stanley in separate reports today, are predicting the bounce off of March lows is in for a bit of retrenchment.
Who’s tossing cold water on the rally? A few folks, including Merrill Lynch and Morgan Stanley in separate reports today, are predicting the bounce off of March lows is in for a bit of retrenchment.
Morgan says it’s moving 5 percent of its equity allocation into bonds, and is still 5 percent overweight cash because the bear market isn’t over. From Morgan (via Reuters): “Our three signposts to identify the end of the bear market do not flash green. We wish to wait for fundamentals to be close to trough before turning more bullish.
The three fundamentals we look at are:
1) Earnings; 2) US housing; and 3) banks’ balance sheets.” Bottom line: The situation is getting better for stocks, but it’s not exactly good. Equities “have already rallied since March 9, and seem to be drawing more investors in. Now we have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now.”
More broadly, Morgan notes that even after the wrenching market declines over the last year we’ve still not experienced a meaningful period of undervaluation in equities since the biggest valuation overshoot ever way back in 2000. Also, the jobs picture remains generally bleak. Morgan says it could be wrong on its bearish call if policy actions have in fact turned the market, but until the glut of unsold homes comes down and loan officers start to cheer up a bit, they remain solidly bearish.
The more-bearish analysts at Merrill Lynch also aren’t buying the latest run-up as a confirmation that markets are getting the all-clear signal. Small cap analyst Steve Desanctis says that even though a big small-stock rally usually leads the bounce off the bottom, this time there’s a good chance of more bad news on the way. He writes (bold is mine):
Although it certainly feels good when stocks move higher, we are still skeptical of this rally as none of our indicators improved and in fact, one slipped. High-yield spreads narrowed marginally last month and still stand at extremely high levels versus its historical average and high-yield financing actually slowed. Volatility is still up on a year-over-year basis and thus far this year, over 20% of the trading days the intraday swing between the high and low of the Russell 2000 exceed 5%.
Earnings are set to fall over 40% in the first quarter reporting season and come in worse than that of the large caps. Valuations still favour large caps and expectations have been reduced, but we think they have further room to fall. This leads us to believe that this rally could peter out sooner rather than later and we could be in for a wide trading range going forward.
1 comment:
Will The Rally Continue?
Kirk Shinkle
6 April 2009
Who’s tossing cold water on the rally? A few folks, including Merrill Lynch and Morgan Stanley in separate reports today, are predicting the bounce off of March lows is in for a bit of retrenchment.
Morgan says it’s moving 5 percent of its equity allocation into bonds, and is still 5 percent overweight cash because the bear market isn’t over. From Morgan (via Reuters): “Our three signposts to identify the end of the bear market do not flash green. We wish to wait for fundamentals to be close to trough before turning more bullish.
The three fundamentals we look at are:
1) Earnings; 2) US housing; and 3) banks’ balance sheets.” Bottom line: The situation is getting better for stocks, but it’s not exactly good. Equities “have already rallied since March 9, and seem to be drawing more investors in. Now we have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now.”
More broadly, Morgan notes that even after the wrenching market declines over the last year we’ve still not experienced a meaningful period of undervaluation in equities since the biggest valuation overshoot ever way back in 2000. Also, the jobs picture remains generally bleak. Morgan says it could be wrong on its bearish call if policy actions have in fact turned the market, but until the glut of unsold homes comes down and loan officers start to cheer up a bit, they remain solidly bearish.
The more-bearish analysts at Merrill Lynch also aren’t buying the latest run-up as a confirmation that markets are getting the all-clear signal. Small cap analyst Steve Desanctis says that even though a big small-stock rally usually leads the bounce off the bottom, this time there’s a good chance of more bad news on the way. He writes (bold is mine):
Although it certainly feels good when stocks move higher, we are still skeptical of this rally as none of our indicators improved and in fact, one slipped. High-yield spreads narrowed marginally last month and still stand at extremely high levels versus its historical average and high-yield financing actually slowed. Volatility is still up on a year-over-year basis and thus far this year, over 20% of the trading days the intraday swing between the high and low of the Russell 2000 exceed 5%.
Earnings are set to fall over 40% in the first quarter reporting season and come in worse than that of the large caps. Valuations still favour large caps and expectations have been reduced, but we think they have further room to fall. This leads us to believe that this rally could peter out sooner rather than later and we could be in for a wide trading range going forward.
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