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

  1. Stevie b. says

    And David Rosenberg should have added that -never before- has communication been so instantaneous! I remember starting work in the late 60’s at Merrill in London. Communication was by telex and the only similarity to today was the abbreviated terminology, used then to save money. News came in via one office printer. Any on-the-ball broker who contacted his clients to take prompt action looked very smart, as the news took days to disseminate.

    It may -have been- normal for this, that or the other in the old days, but nowadays you have to anticipate things even further before the event than ever, because 1 millisecond after the event is too late. Welcome to the new normal.

  2. aitrader says

    So the US Fed has bought 1 1/4 trillion dollars, give or take, of “toxic” mortgage securities through their various alphabet soup of bailout programs ( https://online.wsj.com/article/SB125297162259710323.html?mod=rss_Today%27s_Most_Popular ). With the nationalization of Freddie Mac and Fannie Mae they now own an additional 4-5 trillion bucks in MBS, much of it toxic and much yet to blow up (see the coming option ARM problem here – https://www.dsnews.com/articles/experts-worry-option-arm-time-bomb-is-about-to-explode-2009-09-21 ).

    So Edward, help my limited brain here – just how is it that this stuff on the government’s books (and I include the US Federal Reserve, which is government for all intents and purposes) is safer than when it was on the banks’ books? The government can print themselves out of a crisis, leading to a run on the dollar. They can raise taxes, leading to an even bigger flood of failed businesses and higher unemployment. Or they can appeal to China, et al, for an even higher level of spiraling debt, which seems at current levels to be utterly unsustainable.

    I made the call many moons ago that this is going to destabilize the fiat floating currency pyramid from its shaky roots and cause a global unraveling. If Lehman was an 8-9 on the financial Richter scale, this event would be a 10+.

    And we are going to avoid this just how…? Business as usual? I don’t see it, though apparently the current market does.

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