Cyclical Rally Coming for Equities?

Continued financial deleveraging should keep equity indexes in a well-defined range over the next few years, according to Martin Roberge at Dundee Securities. He expects the lows of 2002 and 2008 will mark the lower band of this range. In the near-term, however, the strategist noted that conditions for a cyclical rally that could push indexes as much as 50% above November lows sometime in the first half of the year are starting to build.

The advance from those lows won’t mark the beginning of a new bull market, but it will prove more durable than the 20% trading rallies experienced last year, Mr. Roberge said in a research note.

“Relative to bonds, equities just experienced their worst 10-year stretch, which should trigger tactical tilts and the rebalancing of strategic asset mix benchmarks toward equities.” He added that, “asset mixers must have a strong conviction that hyper monetary and fiscal stimuli globally will be impotent in order to favour bonds versus equities.”

Recent gains have coincided with the outperformance of gold versus bonds and tighter CDS and credit spreads, he noted, adding that this suggests lower risk aversion and views that central banks may not be lagging far behind the “depression” curve.

As a result, Dundee has a moderate overweight for equities and corporate bonds. It has also reduced its biad for global-geared names versus domestic equity groups. The new sector theme is to overweight deep cyclicals versus defensives.

“This strategy is consistent with a bold global monetary and fiscal policy response, and an extreme valuation gap suggesting that deep cyclicals have discounted a global recession,” Mr. Roberge said.

However, if global fiscal and monetary policy fails to stop the slide of the U.S. and global economy, he warned that the worst-case scenario for equity markets could be 640 for the S&P 500 and 6200 for the S&P/TSX composite index.

Comments

[Dave Wrixon:]

No, you cannot even do the analysis at this point because the data is so meaningless. Look at the stats for the lat six months. And then look at the revised stats. Yes, the latest stats don't mean anything because next month the revised stats will be totally different. And besides how do you spot an inflection point on a vertical dive?

Jan 09 01:53 PM

[Moon Kil Woong:]

What does this mean, the market could go up 50% or fall precipiticly. Like we didn't know that. I guess he left out the market could also trade flat. Guys like these need to get another job.

That or apply to be a ratings agent. Clearly no talent is required for that and you can be as wrong as you like.

Jan 09 03:06 PM

[John Lounsbury:]

Constructe - - -

I gave you a thumbs up, but you are being a little harsh. The article quotes the opinion of a third party (Martin Roberge), which is probably a fairly common opinion. I think the risk to the downside is greater than the opinion quoted, but I don't want to be quite as critical as you do.

Wrixon - - -

I agree that there is little data to hang your hat on, to say nothing of your portfolio. If 2009 is going to be a bad year for stocks, we may have enough additional information to make a determination by April. If its going to end up a good year, we may still not be able to figure that out by April, indeed maybe until the die for the year is already cast.

Jan 09 07:25 PM

[investor88:]

Wow 50% upside! Looks tempting. But caveat emptor, look before you leap in case there are potholes and landmines. Traders can venture long or short as the situation suggest.

Jan 09 08:11 PM

[secmaven:]

If global monetary and fiscal policy fails to stop the slide??? Is there any question. It was TARP and zero interest rates that accelerated the slide! And more of the same is promised in spades.

Jan 10 10:40 AM

[Conan the B...:]

What happened to the Much heralded January Effect?

As go the first 5 trading days of January so goes the month.
As goes the month of January, so goes the year.

The first 5 days are in, prognosis: patient is still ill.
If January as a whole follows this pattern, will that be enough of a shot across the bow or will it be ignored by the Bullish?

Jan 11 03:15 AM

[Conan the B...:]

Dave: Any point can be an inflection point if you make the correct decision. That's why you have so many calls by different trading houses. One or two might be right and will be able to advertise it.

Vertical Dive assumes a "splat" somewhere. I prefer a Falling Knife but will let someone else try to catch it first.

Like the people who brought this article to our attention in the first place without providing either Mr. Roberge's or Dundee"s track records over the past 6-12 months.

IMO

Jan 11 03:30 AM