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Deutsche Bank’s chief U.S. equity strategist, David Bianco, has been worried that the next big move in the stock market will be downward for a while now.And even though many thought additional Fed easing may have been priced into stocks, Ben Bernanke’s announcement last week of open-ended quantitative easing has given the market a temporary boost.
However, in his latest Monthly US Strategy Update, Bianco writes that investors shouldn’t try to chase the QE rally:
The strong market rally suggests that most equity investors, including ourselves, underestimated the magnitude of additional Fed QE. Given the ongoing weakness in key profit indicators, such as manufacturing, industrial production, exports, capital goods orders and most emerging economies, we welcome this aggressive monetary policy, but would have preferred signs of improving global growth. That said, QE3 relieves the downside risk that was building on our 1475 yearend target, but we are not willing to chase the rally or raise our 1500 12-month S&P 500 target yet.
However, Bianco says he’ll be ready to turn around his bearish call that the next big move is down if the market can make it through October.
But Bianco doesn’t think the market will make it through October:
Tactical strategy: The next 5%+ S&P 500 price move likely to be down, but if no dip in October then unlikely to happen by yearend.
October is the next test of market risk appetite. Investors seem to be ignoring weak 3Q EPS, but widespread misses should cause a dip. If investors tolerate weak 3Q EPS, then we are likely to drop our tactical dip call, as we expect y/y EPS growth to resume in 4Q. Our 1500 12-month target is likely to be raised if Republicans take control of the Senate, but not cut if Democrats retain control.
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