Bear Stearns’ Francois Trahan is pulling in his horns.
He was amongst the crowd making the incorrect 2004/05 call for a rotation into Big Caps, and has been mostly Bullish since.
He is now getting some religon, and recognizing the weakening longer term elements:
THE MARKET’S RECENT ATTEMPT AT A BREAKOUT APPEARS MORE CONSISTENT WITH A LAST GASP, RATHER THAN A NEW BEGINNING… if the recent rally marked the start of a sustainable upturn, then market leadership should have been concentrated in early-cyclical segments, such as consumer discretionary and financials, whereas leaders have been sectors that typically fare well in the latter stages of a market move.
INVESTORS SHOULD HAVE TAMER EXPECTATIONS ABOUT THE ROAD AHEAD…the conditions that prevailed in October, when the rally essentially began, have changed… technical indicators in October were conducive to a near-term rebound in stocks at a time when leading indicators began to reaccelerate…. for leading indicators to continue to accelerate from here is a tall order with the Fed in tightening mode.
WHILE THE INFLATION DEBATE SEEMS TO HAVE MODERATED RECENTLY, SOME INDICATORS SUGGEST THAT INFLATIONARY PRESSURES COULD SOON BECOME AN ISSUE AGAIN, EVEN IF ONLY TEMPORARILY… besides traditional inflation hedges such as gold, real estate and other commodities, investors may wish to consider equity segments that benefit from a mild pick-up inflationary trends through pricing power such as telecom.
VARIOUS MARKET SEGMENTS CAN PROVIDE CLUES ABOUT WHAT TO EXPECT FROM ECONOMIC FORCES AND HOW TO BEST POSITION PORTFOLIOS ACCORDINGLY… at this time, economic-sensitive currencies suggest that a further deceleration in the global growth outlook could be around the corner… some specific equity segments currently signal that housing industries of the market could be due for a slowdown.
A KEY REASON WE DO NOT THINK THE RECENT EQUITY RALLY IS SUSTAINABLE IS THAT THERE IS STILL TOO MUCH OPTIMISM IN THE MARKETPLACE… when investor sentiment lingers in bullish territory, the market typically becomes vulnerable to the slightest bit of bad news… furthermore, sustainable rallies tend to begin with sentiment is depressed, rather than when it is already stretched.
NY, March 2006