David Rosenberg believes the rally we are seeing in stocks is a ‘pure illusion” due to reasons other than the fundamentals. He says the market is graded in devalued dollars and has now become a race to outpace the other momo chasers.
A TECHNICALLY DRIVEN MARKET
“Well, you know the technicals are taking over when: (i) at the July 10 interim low, the S&P 500 bounces off the 200-day moving average, and (ii) at the October 2 interim low, the S&P 500 bounces off the 50-day moving average. The fact that the market receives so much support at these key technical thresholds is something we, even as market pundits that are more geared towards assessing the fundamentals and valuation metric, have to respect.
That said, there are some nagging charts to consider. For example, the Dow and S&P 500 are rolling over in virtually every other currency terms, including gold, so much of the rally is purely ‘money illusion’ in the sense that the U.S. markets are being graded in devalued dollars. Moreover, the financials have begun to lose their relative strength — something to keep an eye on as this is the group that has to sustain its outperformance in order for the bear market rally to last. And overseas, we can see some key Asian markets, such as the Korean Kospi and the Japan’s Topix index, have broken below their 50-day moving averages.”
As the Q3 earnings season kicks off today, what investors will be looking for in particular are signs that companies are boosting revenue growth and raising future guidance at the same time. These will be the keys for near-term performance”.