Last time we heard from Nomura’s uber-bear Bob Janjuah, he said stocks were going to rise until the VIX, or volatility index, closed below 10.
That didn’t happen, but stocks are selling off, and Janjuah has some thoughts on why it looks like the S&P 500 could be headed to 1,600.
Janjuah noted, as others have, that 1,905 was serving as major support for the S&P 500, and below that level the index might not find meaningful support until 1,770.
But Janjuah is also looking at another factor that could be weighing on stocks: the end of QE.
“I want to remind readers of a message that may be buried in the past: When QE1 ended the S&P 500 fell just under 20% in a roughly three-month period before the QE2 recovery. When the QE2 ended the S&P 500 fell about 20% in a three-month period before the next Fed-inspired bounce (aided by the ECB). QE3 is ending this month. The S&P 500 peaked in the low 2000s in Aug/Sept. So, -20% and three months would take us to 1600 by late November. This is clearly not a scientific analysis, but it may provide some food for thought.”
In his latest note, Janjuah also writes that his prior view that through a strong US dollar, the US would important deflation its economy isn’t strong enough to handle has played out and adds, that, “much of the evidence I see points to the fact that the US consumer is neither willing and/or able to lever up to support or boost its consumption.”
“I think markets are now collectively having to consider what I think is the reality,” Janjuah writes, “that annual trend global growth is converging down at around 2.5%, well short of the pre-crisis levels of over 4%.”
But Janjuah’s comments about the end of QE are a refrain that has become a little more common this month, as the S&P 500 has fallen about 9% from its September 19 highs.
The recent market sell off has been blamed on a number of things: the falling price of oil, softening economic data from Europe, and falling bond yields, among other things, but it’s also hard to tell the chickens from the eggs.
In short, no one knows exactly why stocks are going lower, and where they might be headed.
So Janjuah’s comments are just something to keep in mind, as after three volatile sessions this week, stocks were set to open lower on Thursday.