Briefing highlights
- Investors brace for more distress
- Markets at a glance
- Caterpillar tumbles
21 months
You may have 21 months before the stock market peaks.
That’s according to a bear-market gauge from Bank of America Merrill Lynch, whose equivalent of a doomsday clock is ticking down.
“Two more ‘bear market signposts’ (VIX and consumer confidence) were triggered in early October, while another signpost (market returns) reversed to positive, bringing the tally to 14 of 19, or 74 per cent, of signposts triggered,” said Savita Subramanian, one of the bank’s equity and quant strategists, and a team of other analysts.
That 74 per cent is an increase from 68 per cent in September.
“When a similar percentage of bear market signposts have been triggered in the past, it has taken 21 months on average for the market to peak,” the analysts said.
“Four of the past seven bull markets have peaked with 100 per cent of the indicators having been triggered.”
The first signpost cited by Ms. Subramanian, the VIX or market volatility measure, has climbed. The second, the Conference Board’s consumer confidence survey, shows only 20 per cent of those polled now expect stocks to gain.
As other observers have documented, this is the most hated bull market in history, one driven by extraordinary central bank stimulus and low crisis-era interest rates, and, thus, can’t be sustained.
Stocks, indeed, are “more hated than ever,” Ms. Subramanian and her group said, though there’s no fear of bonds.
And in a separate report this week, Morgan Stanley analysts warned that the rebound from the dramatic selloff a couple of weeks ago was just what’s known as a dead-cat bounce. Indeed, markets are slumping again today.
“We don’t think the correction is done yet,” said equity strategist Michael J. Wilson and his colleagues.
“We think attempts to rebound were more short lived than sustainable,” they added.
“Recent price declines in crowded growth, teach and discretionary [stocks] have caused enough portfolio pain that we think most investors are playing with weak hands. We are increasingly thinking a rally into year-end will be harder to come by as lower liquidity and concerns on peaking growth weigh on the [S&P 500] and an investor base in defence mode.”
David Rosenberg, chief economist at Gluskin Sheff + Associates, also threw up some red flags.
“While the bulls point to the fact that 72 per cent of the S&P 500 companies reporting thus far have beating on their EPS estimates, a subpar 64 per cent have managed to do so on the revenue line … the lowest share in six quarters and somehow inconsistent with the strong-economy narrative,” Mr. Rosenberg said.
“A new feature of the marketplace is this new-found inverse relationship now between stock and bond yields,” he added.
“Twice now we have seen a bout of surging Treasury yields take stock prices down. This stands in stark contrast through most of the cycle – when [central bank quantitative easing] stimulus took yields lower and equities higher as investors moved out the risk curve. This negative correlation has only happened four other times for this long a time period in the past three decades, and is a bad omen for the broad equity market.”
Read more
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Michael Babad