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Saxo Bank. The Specialist in Trading and Investment.
July 3, 2009
SAXO BANK RESEARCH
John J. Hardy
Christian T. Blaabjerg
Hot topic: Range bound
It is still not the end of the bear market. Consumer confidence and
other ‘green shoots’ leading indicators have led markets higher until now, but
have now turned into yellow weeds as hard facts based indicators have notrecovered as fast as expected. Earnings are back in focus and the ongoingearnings season needs to show good signs other vise we will have a retracementin equities. In the longer run we prefer shorting the market as we do not expectthe economy to improve much beyond what is already priced in. Furthermore wedo not see the risk of bond markets getting hit from the massive new issues of debt from governments (which should lead to higher interest rates) being a partof the current equity risk premium.
Long run view:
Our fundamental signposts that identify the end of thebear market still do not all flash green yet. 1) The reported Return on Equity(ROE) ex. financials for S&P500 should be below its long run average of 12.8%,which it actually is now
reading 12%; 2) Our business cycle indicator shouldindicate a significant reversal in macroeconomic numbers
it has turned, but isstill at depressed levels, 3) Inventories of unsold homes should be below 8months of sales and 4) Senior Loan officer (SLO) survey should be better than -20%, where it is currently reading -39.6% (April numbers; the next survey will bein July). We are still bearish on equity markets.
Short run view:
Our market indicators show mixed signs as to whetherthe current rally will continue. On the one hand the Volatility (VIX) continues itsdecline and the CDS price index have followed pointing towards some supportfor equity markets. Furthermore the bond spreads shows signs of improvedcredit markets. On the other hand points our US weekly indicator the other way;it is still at record lows showing only a marginal rebound and CAPE seems to haveretraced a bit. The conclusion based on our indicators is not firm regardingdirection. In order for equities to head higher we need to see a solid break of the956-level in S&P500 and the next stop from here would be around 1014. If this isnot happening we expect it to range trade in the short run.