By David Parkinson
David Rosenberg says the "sweet spot" for the stock market is over.
In a note to clients Monday, the oft-bearish chief economist and chief market strategist for Toronto money manager Gluskin Sheff + Associates Inc. argues that, after months of enjoying conditions conducive to big gains, rallying equities are showing signs of wear and tear - both from the inside and from the outside.
What's more, Mr. Rosenberg - much in the style of anotheer famous David (Letterman) - has given us a handy list of 10 reasons why.
The list (which we run in its entirety, below) begins with the latest big development for stocks - last Friday's surprsingly strong U.S. employment report. It instantly threatened to change the rules of the game for equities, which had been enjoying the benefits of both low interest rates and low labour costs for months now.
There's more to it, than that, however. But let's let Mr. Rosenberg enumerate the warning signs in his own words:
1. For the time being, the equity market is going to have to contend with more chatter of the Fed’s exit strategy.
2. The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.
3. Market leadership is beginning to fade, as seen by the receding advance-decline line on the big board.
4. Market complacency is a worry, with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.
5. The [Wall Street Journal] ... reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing, too.
6. Volume has declined markedly and has surpassed 4.7 billion shares on the NYSE just once in the past three weeks.
7. With the correlation between a weak greenback and a positive stock market above 90% over the past eight months (versus zero over the past 30 years), a countertrend rally in the U.S. dollar would likely coincide with sputtering equity prices.
8. The Dow transports/utilities ratio has turned in a classic triple-top, and this is a signpost to get defensive.
9. The latest Investors Intelligence poll shows the bull camp at 50%; the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective (another sign of complacency).
10. Corporate bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.