Can you trust the current market rally?

We have the solid rebound that everyone is yearning for. The Santa Claus rally appears on the horizon, and traders are busked in a flood of optimism.

A week of weak economic data on the labour front seemed to have changed the tide, with investors pricing in an interest rate cut sooner than the Fed expected.

I continue to hold considerable positions, although a pare down from an uncomfortably high level, it is worthwhile to hear from the bears of their argument. In this episode, let us review the 3 key reasons why Rosenberg Research isn’t trusting the current rally.

In the research, the three broad reasons are :

Earnings guidance is poor.

Third-quarter earnings are sound, but the guidance indicates a cloudy future. The fourth quarter earnings estimate per share has fallen by around 4%, and this is prevalent across 8 out of the 11 sectors.

Short-covering drives markets higher.

The current market rally results from a short covering of the intense shorted stocks, which often have weak balance sheets, or some called ” non-profitable” technology. This is a mirror of a rally driven by technicals rather than fundamentals and thus requires us to be more cautious.

Small caps rally is missing.

A durable market rally often requires breath in the upswing for most sectors, particularly the small caps. However, Russell 2000, which comprises the small-cap stocks, isn’t participating in this rally. While the index has risen 4.3% in monthly return, they are still registering a negative return of 1.6% for the year.

As the research pointed out, the gap in the return between Russell 2000 and Nasdaq is 32%, the largest seen in 2.5 decades, last seen in the progress towards the Dot-Com bubble.

It is interesting to note that Rosenberg has a reputation for being in the bear camp, but the Wednesday release does pull investors back to the cautious optimism camp.

It is Thursday, November 9, at 8.40 am in Singapore and 8.40 pm in New York. We wish all friends a profitable trading day ahead.