View of the Day: The return of the bears

Financial Times – 09/12/2009 – Albert Edwards

The equity bear market is not over, warns Albert Edwards, analyst at Société Générale. “The valuation bear market began in 2000 and we have only seen two acts of a far longer and more disturbing play,” he says. The mega-rally in equities this year is little different from what was seen in Japan during the mid-1990s, he adds. “Certainly when I see the current extremely low number of equity bears [the lowest as measured by Investors Intelligence since the market top of 2007], the likelihood is that the next leg of the long-term structural valuation bear market is closer than people realise.”

The key is to know when to sell. “Even a structural bear could have made a lot of money in Japan playing cyclical rallies, but he/she needed to sell as the cycle turned downwards. Hence the topping out of some key US leading indicators may signal the top of the equity rally is close.”

In chart terms, the S&P is stuck close to its 50 per cent retracement level from the October 2007 peak. In addition, key indicators such as the relative strength index have been weakening on poor volume throughout the second-half rally, suggesting a lack of strong technical underpinnings. “Very weak German new orders and production data for October put a dent in the cyclical optimism that has abounded for most of this year. Markets will march to a very different drumbeat next year.”

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