Overbought?
Yesterday, I wrote “Some think this is a secular bull – a view I am not discussing in this post. Others see this as a cyclical bull-market a.k.a bear market rally I would put Jeremy Grantham in this category
. I would also put myself here, although I do think short-covering has made this rally dangerously over-bought.” Apparently, I am not the only one who thinks this market is way over the top here. David Rosenberg has issued a missive saying similar things with some robust statistical support.
Going back to 1950, not once has the S&P 500 managed to surge more than 40% in advance of the recession ending. I think mostly everyone would agree that while the recession may be in its final stages, it is not over just yet.
On average, the S&P 500 rallies 20% from the lows to the end of the recession. I realize that the comeback is that we hit an egregious low, but we always do in bear markets. I am just talking about what the ‘norm’ is, in terms of rallies that typify the late stage of the recession in the real economy. So, it would not be untoward to see a 20% correction just to mean revert this rally from the lows, assuming that this is all about hopes of the recession coming to an end. Yes, that would be 750-plus. As an aside, Sam Stovall from Standard & Poor’s stated in the Sunday NYT that 800 on the S&P index is an inevitable retest point.
Again, back to 1950, by the time the S&P 500 was up 42% from a bear market low (as is now the case), not only was the economy not in recession at that point, but it was typically nine months into recovery mode. So even if the consensus is correct that the recession ends by September, the market right now is trading where it would ordinarily be in May 2010. What are we going to do for an encore?
Clearly, this is a case of caveat emptor.
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“I think mostly everyone would agree that while the recession may be in its final stages, it is not over just yet.”
1/ “Mostly everyone”? Surely a large body of opinion has it that the recession is anything but “in its final stages”. Just read Mish for one flavor of an alternative view. However, if David is right, then:
2/ If virtually everyone thinks the recession is in its final stages but not quite over yet, then this view must already be discounted at current price levels! If David is right, as a contrarian I should be buying! Well I am a contrarian, but I’m not buying David’s logic…and for totally different reasons I’m also not buying the market!
So basically, statistics aside – and it is disingenuous to try to make a current point by using statistics from an earlier age when communication happened at the speed of a horse walking backwards! – I think he’s right, but IMHO he uses muddled thinking and warped market logic to get there.