Way too much risk in the equity market
Following up on my “Sell equities” post, I want to highlight a factoid from today’s David Rosenberg’s Breakfast with Dave distribution.
Never before has the S&P 500 rallied 60% from a low in such a short time frame as six months. And never before have we seen the S&P 500 rally 60% over an interval in which there were 2.5 million job losses. What is normal is that we see more than two million jobs being created during a rally as large as this.
In fact, what is normal is for the market to rally 20% from the trough to the time the recession ends. By the time we are up 60%, the economy is typically well into the third year of recovery; we are not usually engaged in a debate as to what month the recession ended. In other words, we are witnessing a market event that is outside the distribution curve.
I had been pretty bullish in March and April. But almost immediately, this rally just went straight up in a moon-shot kind of way that makes someone like me who is more oriented toward fundamentals a bit nervous. After months of wondering how long this thing could last, I’ve finally said sell.
I’m not saying that the rally can’t continue (after a correction). That depends in part on the economy and reflation. What I am saying is that a two- or three-sigma move should have you asking yourself a lot of questions. And since this is a two- or three-sigma move to the upside, you should be taking profits, not chasing that last dollar.
The video below from 7 Sep with Cazenove’s Robin Griffiths gives one the bigger picture. Going into treasuries is a flight to safety. Going into gold is the same. Notice that Griffiths dispels the notion that Gold is an inflation hedge alone. In reality, it is a paper money hedge and its rise represents a fiat currency rejection as much as a portend of inflation.
Breakfast with Dave, 18 Sep 2009 (PDF) – David Rosenberg, Gluskin Sheff