Rosenberg - Semi-possible year-end rally

We went out with one of the most respected technical strategists on Wall Street last week, and she put us on warning that without Europe, in her view, the S&P 500 would be 1,400, and that this is no time for dogma [adamant hewing to R's fundamentals-based market pessimism]. Her surveys show that hedge funds are radically underweight, they collectively missed the huge October rally, and will be buyers in the absence of any more European “noise”. That said, while she thinks 1,385 is a “good bet” into year-end, especially if a market that has looked more closely at current economic data rather than what the outlook is, and sees no Q4 contraction. She would sell into late December — anything over 1,350 is a huge sell into 2012. She sees no volume conviction on this rally. This has a four-to-six week shelf left. Euribor-OIS spreads are to be monitored — banks can’t make a bottom until this tripwire rolls over (her charts show the Eurozone bank stocks at the 2009 low, which is technically important). This is the proverbial canary in the coal mine.

We are the furthest thing from being optimistic over the growth outlook, notwithstanding the fact that the economy has surpassed our expectations in Q3 and Q4. We see this as temporary. But the view over how the hedge funds are now positioned and how they may get panicked into buying equities in order to play “catch up” cannot be ignored. The Commitments of Traders report bears this out as the non-commercial accounts are net short 53,386 S&P 500 contracts, but have cut them in half in recent months. This covering of the shorts occurred in last year’s Q4 and we have to acknowledge provided critical fund- flow support for the market into the end of 2010.