There was much excitement a month ago when Morgan Stanley strategist Teun Draaisma, announced a “full house” buy signal from the four key indicators he follows (Valuation, Capitulation, Risk and Fundamentals, if you are interested).
Apparently, this was the strongest signal to buy equities in six years and the indicators had a near perfect track record.
But after last week’s record breaking rally for global equity markets, Draaisma has turned bearish, downgrading equities to “neutral” from “overweight”.
Patience is the preferred virtue, cash the preferred asset in bear markets. Equities have already reached fair value, in our view, but big valuation overshoots are typically followed by big valuation undershoots, and the 2000 valuation overshoot was the biggest ever.
Draaisma says the case for a bear market rally is still there, but with markets swinging around violently and fundamentals still poor, the game has become much more dangerous.
Throughout the year, we thought that this bear market was like the early 1970s or 1990s, when the market low is reached early on once inflation peaks, valuations are cheap, and policy makers panic. This may still turn out to be the case, but we are not so sure anymore, because disinflation could become a deflation scare, the valuation case is not rock bottom yet, and policy traction is limited in times of deleveraging and lack of confidence
However, the super bear/bull has not given up on signposts completely. He says a new bull market could start in second half of 2009 but not before.
Our three signposts to signal the start of the next bull market relate to earnings, US house prices, and deleveraging.
We expect a 43% earnings recession by the end of 2009, and US house prices to trough in 1H 2010. It could be worse. The next bull market could start one to two quarters ahead of the trough in earnings or US house prices. A third important signal would be when the Fed’s Senior Loan Officer Survey signals that deleveraging is well advanced. In bear markets, patience is the golden virtue, capital preservation rules.
Related Links
Why Draaisma is saying Buy, Buy, Buy - FT Alphaville
