Gluskin-Sheff’s David Rosenberg reads the tea leaves on the recent market runup and concludes the correction may not be over, drawing particular attention to volume:
IS THE CORRECTION OVER?
There is room to have an open mind in both directions, though we believe that
there is still more downside than upside risk. The problem for the bulls is that
the market gains have occurred on lower volume, which was down 6% on the
NYSE yesterday, and the major indices are still stuck below their 50-day moving
averages (the only exception is the S&P 600).
But the bulls will note that the market now does have some technical strength
(as outlined in today’s Investors Business Daily). The major averages have
closed in the upper half of their daily ranges for six sessions in a row and often
at or close to the highs of the day. The list of stocks hitting a new high has hit
200 versus 12 those hitting a new low.
Sentiment has turned extremely negative considering that this correction was
barely over an 8% down-move but indeed, before it occurred, the Investors
Intelligence poll was at 52.2% bulls (18.9% bears) and at the recent lows it was
at 35.6% bulls (and 27.8% for the bears). That is a contrarian positive, at least
on a near-term basis. Moreover, there is a high correlation between the Euro
and the S&P 500 and the short positions in the currency is at an all-time high,
and as these shorts have to be covered, the dollar has softened a tad off its
recent highs and this has corresponded with the rebound in the equity market.
Finally, we have 73% of companies beating their earnings estimate — this has
dominated the press, and the fact that tech bellwethers like Hewlett-Packard
managed to beat their estimates and raise guidance (as did Deere and Whole
Foods) has also helped add some recent enthusiasm in the bullish camp. This is
an exercise to see both points of view, keep an open mind; however, we have
not waffling and maintain a cautious view over risk assets for 2010. This is still
a technically-driven market — for confirmation of the sustainability of the
rebound (recall that there were four other 5%+ declines during this bear market
rally phase) we need to see:
1. Follow throughs (gains of at least 2% consecutively and on higher volume),
2. A move back above the 50-day moving averages for the major indices.
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