THE SWEET SPOT IS OVER

David A. Rosenberg is Chief Economist & Strategist at Gluskin Sheff, with a focus on providing a top-down perspective to the Firm’s investment process. Mr. Rosenberg has earned both Bachelor of Arts and Master of Arts degrees in Economics from the University of Toronto. Prior to joining Gluskin Sheff, David was Chief North American Economist at Bank of America-Merrill Lynch in New York and prior thereto, he was a Senior Economist at BMO Nesbitt Burns and Bank of Nova Scotia. Mr. Rosenberg has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years.

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Below are 10 reasons why we believe the Sweet Spot is Over :

1. For the time being, the equity market is going to have to contend with more chatter of the Fed’s exit strategy.

2. The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.

3. Market leadership is beginning to fade as seen by the receding advance-decline line on the big board.

4. Market complacency is a worry with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.

5. The WSJ (page C1) reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing too.

6. Volume has declined markedly and has surpassed 4.7 billion shares on the NYSE just once in the past three weeks.

7. With the correlation between a weak greenback and a positive stock market above 90% over the past eight months (versus zero over the past 30 years), a countertrend rally in the U.S. dollar would likely coincide with sputtering equity prices.

In the U.S., it was fascinating to see the stock market’s reaction to the employment data on Friday; the markets couldn’t handle the good economic news
8. The Dow transports/utilities ratio has turned in a classic triple-top and this is a signpost to get defensive.

9. The latest Investors Intelligence poll shows the bull camp at 50%; the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective (another sign of complacency).

10. Corporate bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.

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