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Two Historical Factoids From David Rosenberg at Trader’s Narrative

david rosenbergHere is a recent note from David Rosenberg:

“Two historical factoids underscoring just how overbought this market really is:

Going back to 1950, not once has the S&P 500 managed to surge more than 40% in advance of the recession ending. I think mostly everyone would agree that while the recession may be in its final stages, it is not over just yet.

On average, the S&P 500 rallies 20% from the lows to the end of the recession. I realize that the comeback is that we hit an egregious low, but we always do in bear markets. I am just talking about what the ‘norm’ is, in terms of rallies that typify the late stage of the recession in the real economy. So, it would not be untoward to see a 20% correction just to mean revert this rally from the lows, assuming that this is all about hopes of the recession coming to an end. Yes, that would be 750-plus. As an aside, Sam Stovall from Standard & Poor’s stated in the Sunday NYT that 800 on the S&P index is an inevitable retest point.

Again, back to 1950, by the time the S&P 500 was up 42% from a bear market low (as is now the case), not only was the economy not in recession at that point, but it was typically nine months into recovery mode. So even if the consensus is correct that the recession ends by September, the market right now is trading where it would ordinarily be in May 2010. What are we going to do for an encore?”

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3 Responses to “Two Historical Factoids From David Rosenberg”  

  1. 1 wayne

    Although we have never had a 40% rally in advance of a recession ending, the 40% rally only retraced about 1/3rd of the selloff. And 1/3rd to 1/2th rallies are typical of bear market rallies. Hard to make historical analogies when you are in uncharted territory. How many times in history have we had short term interest rates at 0, negative earnings, GNP at minus 05%, unemployment at 10%, govt spending and borrowing at unheard of levels?

    Also, I’m not sure that everyone agrees that we are in the last stages of a recession. But I cannot argue with his statement that we could be overbought here. In mid February, the three sentiment polls listed weekly in Barrons were all at historic bearish levels. Now they are back to 50/50ish, a level you would expect a bear market rally to take us back too.

    In uncertain times, sometimes it is best to listen to the markets for guidance. keep your eyes on 2nd quarter earnings. It is possible that the market is trying to tell us something that we do not know and if the S&P can post a 10 for the 2nd quarter, we can then start to put the 2008 4th quarter (-23) behind us and look for a 40 for 09 and there is the chance that the market is already putting that quarter behind us.

  2. 2 bob j

    If you go back to the early 1900’s, then 40% rallies prior to recessions ending exist. Still, 40% is overbought on average.

  3. 3 Babak

    wayne, I’m listening and watching but nary a whisper - do you detect anything? :)

    bob, you noticed that too, eh? I wonder why Rosenberg picked 1950’s as a cut-off point.

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