The market has fallen for 3 straight days, and so David Rosenberg is brimming with confidence that his bearishness has been vindicated.
In a note today he wrote that it’s “crystal clear” that the rally that started in early September was full of hot air:
With 20-20 hindsight, it is now crystal clear as to what caused everyone to hyperventilate back in early September regarding the prospects of a sustainable recovery underpinned by the Federal Reserve and its well-advertised QE2 program. Not only the Fed, but also the mid-term election that promised to replace uncertainty with gridlock — it hasn’t turned out that way. Practically everyone believed that uncertainty had been swept away in the immediate aftermath of the November 2nd election and the November 3rd Federal Open Market Committee (FOMC) meeting, which is how the VIX index (a measure of volatility in the market) managed to recede all the way back to 18-and-change.
But the evidence doesn’t support this assertion.
First of all, as we’ve been saying A LOT, the rally started on September 1, the day of a red-hot ISM number. If the market had been rallying based on the “well-advertised QE2” program, it might have started on August 27th, the day of the Jackson Hole speech, but that speech didn’t do jack.
Second, and again as we’ve saying a lot, since then we got a string of better than expected macro data, and really, nothing makes the market move like better-than-expected data.
So to say there’s nothing fundamental associated with the rally is just wrong.
The funny thing is, we wondered aloud multiple times whether the election and the QE2 announcement would spur some kind of “sell the news” selloff. Here we brought up this fear on September 22.
But that’s not how things went down. Stocks went up for a couple days post-QE (QE was announced November 3, Cisco whacked the market a week later), and what really clubbed the market were tightening fears out of China that hit on Friday the 12, more than a week after QE. And Chinese tightening IS a legitimate concern to the global economy and US stocks, but it’s not evidence that the market rally was based on vapor all along.
There’s more to consider, too. The S&P 500 is only down 3.5% from its recent high, compared to a rally of about 16% from the equity market low, so… yeah, a bit early to be declaring victory, no?
Beyond that, the flow of solid data hasn’t abated yet. This week’s retail sales were excellent. Yesterday showed an ongoing rebound in manufacturing. Also last week’s initial jobless claims were the best in quite some time.
So we’ll see if the market comes back down as Rosenberg expects, though in the meanwhile, we do know that Rosenberg’s bullish gold and Treasury calls have been going the wrong way.