The sweet spot is over, according to Rosenberg

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David Rosenberg, formerly chief economist at Merrill Lynch and now with Gluskin Sheff & Associates, lists the following ten reasons why he believes the sweet spot in the stock market is over:

1.    For the time being, the equity market is going to have to contend with more chatter of the Fed’s exit strategy.

2.    The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labor costs and margin expansion is behind us.

3.    Market leadership is beginning to fade as is evident in the receding advance-decline line on the big board.

4.    Market complacency is a worry with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.

5.    The Wall Street Journal reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing too.

6.    Volume has declined markedly and has surpassed 4.7 billion shares on the NYSE just once in the past three weeks.

7.    With the correlation between a weak greenback and a positive stock market above 90% over the past eight months (versus zero over the past 30 years), a countertrend rally in the US dollar would likely coincide with sputtering equity prices.

8.    The Dow transports/utilities ratio has turned in a classic triple-top and this is a signpost to get defensive.

9.    The latest Investors Intelligence poll shows the bull camp at 50%, and the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective (another sign of complacency).

10. Corporate bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.

Source: David Rosenberg, Gluskin Sheff & Associates – Breakfast with Dave, December 7, 2009.

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1 comment to The sweet spot is over, according to Rosenberg

  • Frank W

    Apparently, rebalancing is what made the market rally from the 66something low. That is about the only thing that could account for the good market breadth during the rally. Now that the rally has gone too far, rebalancing is evidently having the opposite effect.

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