Are there just too many bears for equities to go down?

March 5, 2012

Global Macro

I’m a student of history, economic history in particular, and it is this reverence for history that has me so deeply concerned for the long term future of the developed economies indeed the global financial system.

But at certain times in this GFC it has become unfashionable to remind people of your view that the current ebullient mood in markets is based on shaky assumptions.

It’s the low growth future and the distorting impact of free money and zero interest rates that is my primary concern when I look at valuations which are of course the key metric by which equities and other growth/risk assets are valued.

It is important to note now that I don’t think this is a Bull Market. Nor do I think this is a Bear market. Rather I see this as a long term secular sideways market in the manner of Vitaly Katsenelson’s Little Book of Sideways Markets

At times I want to buy and others I want to sell – I’m a “buy and sell” guy not a buy and hold guy. So recently I’ve been suggesting its time to lock in some of the profits on this years rally.

But our friends over at Global Macro Monitor asked a reasonable question Friday. Is the Correction Camp Too Crowded? They wrote,

We posted yesterday that the S&P500 was set up for a pullback after carving out an outside day (higher high and lower low than previous day) at strong resistance and looked for follow through selling today. Didn’t happen.

In fact, the S&P500 followed yesterday’s outside day with an inside day with today’s high/low lower/higher than yesterday’s. This reflects a lack of sellers and nervous buyers.

An inside day following an outside day is a relatively rare three-day pattern and has initially happened on six times since the current bull market began on March 6, 2009. In every case, the post 5-day return on the S&P500 was positive, averaging 2.08 percent.

Today’s pattern and run up looks very similar to the one made on January 31, 2011. The S&P500 rallied 22 percent in 108 trading days from the August 26, 2010 low into the inside/outside three-day pattern. It added another 4.4 percent in the next 14 trading days before correcting.

Like many — maybe too many – we remain cautious and do look for a pullback after such a big move but do respect the trend and history.

As I wrote last week this market is a conundrum for both buyers and sellers. Sellers keep getting stopped out and buyers just aren’t seeing a dip.

It is certainly a confounding time in markets at the moment but for me the over riding outlook remains for lower growth through time – now if I could just balance out the impact that free money and zero interest rates are having on valuations at any given time I’d make a fortune.

But for now I guess I’m happy just to preserve capital.

Have a great day

Gregory McKenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation

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