Taking a look at 4 Variables of the Equity Market

Per ex-Merrill Chief Strategist, David Rosenberg, there are 4 variables that influence the equity market at any given point in time 1) technicals 2) valuations 3) fund flows/liquidity 4) fundamentals.

This is what ‘Ol Rosey has to say about them:

1) The technicals had been positive but are now in doubt since the S&P 500 could not take out that critical technical level (Fibonacci retracement) of 1,015 on a closing basis despite making several attempts, especially after that “better-than-expected” nonfarm payroll report.

2) Valuation metrics, in general, were never compelling to begin with and we now have an equity market priced for 4.0% real GDP growth and 40% corporate earnings growth and a P/E that is the richest in five yeas. No bargain here.

Fund flows had been, on net, a positive; however, after the last few weeks, where short interest on the Big Board has declined nearly 10%, it would seem as though this “squeeze” is over. We also see that corporate insiders are now selling more stocks than buying, by a ratio of almost 10 to 1.

Finally, as we saw in 2002, even when a recession ends, recoveries don’t necessarily begin. We are in a post-bubble credit collapse and yet most economists and strategists still like to use comparisons from past manufacturing inventory cycles when they do their analysis. Below we highlight the deflationary challenges for top-line revenue growth — the question for earnings is whether the massive cost-cutting moves can continue to act as an antidote to ongoing revenue deterioration


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August 2009
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