Wednesday, November 05, 2008

Bear to Bull Converts: Merrill’s David Rosenberg Next?

This article from David Berman of the Globe and Mail (all highlights mine),

``David Rosenberg, North American economist at Merrill Lynch, acknowledges that he remained too bearish for too long after the stock market hit bottom in the fall of 2002. Now, he wants to learn from those mistakes.

``So, even though he believes that valuations are not yet compelling and the economy continues to deteriorate – key supporting evidence for why the stock market may have yet have hit bottom – he's keeping an open mind.

“While I am not yet of the mind to start turning bullish, I think it does pay to pay homage to the many legends out there who had been cautious or outright bearish, and are now starting to change their views that, at the least, the worst may be over,” he said in a note, pointing to Warren Buffett, Jeremy Grantham, Bob Farrell, Don Coxe, and Steve Leuthold.

``He also dug up some numbers to suggest that the bottoming out process tends to be just that – a process that occurs over time, with a number of tests that challenge the low points.

``“Now I don't want to get overly excited, but I may have discovered the Holy Grail in terms of identifying a ‘bottom' that is tried, tested and true as opposed to one that may be a trap,” he said.

``He examined 12 stock market troughs for the S&P 500 going back to 1932. There was always a retest of the lows. On average, there was a 35-day lag between the actual low and the interim peak; the initial bounce averaged 16 per cent. Then, the index goes through a testing process, which also lasts 35 days. During this testing process, three-quarters of the bounce from the low to the interim peak is reversed.

“So the entire bottoming phase – trough to interim-high and then to the retest of the low – usually lasts 70 days,” Mr. Rosenberg said.

“We only know for sure when the low was a fundamental low at one particular moment of time, and that is when the S&P 500 crosses above both the 50- and 200-day moving averages. On that day, the bull market becomes fully entrenched, no questions asked. All 12 times, the market was up and up a sizable amount the following year, by an average of 25 per cent.”


Merrill’s David Rosenberg is clearly having second thoughts about his “super bear” stance in the recognition of the growing crowd of authoritative apostates.

Yet, Mr. Rosenberg wants to be convinced from the market action angle.

His “holy grail” means that this bounce will encounter its next retracement from which should test whether the October 10 low will hold.

There is an approximate 70 days-constituting 35 days for the present upside and another 35 days to the next downside retracement-for the test cycle.

If the retracement fails to take down the October 10 lows then by Mr. Rosenberg’s metrics, the bottom in the US markets would have been established. And Mr. Rosenberg will probably give up his bear market hat for growing horns.

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