02/08/10 Jacobus, Pennsylvania – I believe equity markets (and riskier assets in general) are in the midst of a 10-15% correction that plays out within one quarter, which is normal, not at the onset of the next financial avalanche, which lasts many quarters.
There was never any question that the extraordinary policy maneuvers of 2009 would begin to be unwound in 2010. But the culmination of events in Europe, China and the United States over the last two months have brought this all to a head very early on in 2010. Profit taking after large, sustained bull runs is a natural reaction of investors to a bout of increasing uncertainty and higher risk recognition.
On the US equity side, the Institute for Supply Management (ISM) manufacturing index has a history of tracking the year-over-year rate of change of the S&P 500. Over the past three decades, a reading on the ISM above 45 has been associated with positive capital gains on the S&P 500. A reading above 50 (like last week’s 58.4) has been associated with equity market gains above the long-term historical nominal average of 10-12%.
For this to be the onset of the next avalanche in equity prices, we would need to see the ISM composite index falling like a rock from its January high. That outcome seems unlikely with inventory rebuilding just beginning to kick into gear and leading economic indicators still on the rise.
Dan Amoss
Dan Amoss, CFA, is a student of the Austrian school of economics, a discipline that he uses to identify imbalances in specific sectors of the market. He tracks aggressive accounting and other red flags that the market typically misses. Amoss is a Maryland native, a graduate of Loyola University Maryland, and earned his CFA charter in 2005. In spring 2008, he recommended Lehman Brothers puts, advising readers to hold the position as the stock fell from $45 to $12. Amoss is managing editor of the Strategic Short Report.
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“…… and leading economic indicators still on the rise.”
I don’t know what it is you’re inhaling but it’s probably illegal.
RH
Funny! Whether this article becomes true or not, why would anyone believe this guy! He’s the very same guy that predicted The Bank of Montreal would crater back in August. Give me a break! The fact that this guy even has the nerve to continue his “short report” writing is amazing!
Thanks, Daily Reckoning for putting someone with sense and reality on the site. Sometimes, gloomers, you need a little sunshine!