When the stock market falls to a level you had predicted, do you move all your chips into the middle of the table? Not if you're David Rosenberg.
The infamously bearish North American economist at Merrill Lynch had been calling for the S&P 500 to fall to 666 – not because he is a fan of The Omen, a creepy film, but because that's what you get when you apply a 12-times valuation multiple to forecasted 2010 operating earnings of $55.50 (U.S.) a share.
The S&P 500 hit 666 last week, about seven months before Mr. Rosenberg thought it would, marking a new 12-year low.
“As research analysts, we are now faced with the task of either giving the all-clear and telling you that everything is priced in and that we've seen the trough, or assessing whether we have to change the goal posts once again,” Mr. Rosenberg said in his note.
Say hello to a new target on the S&P 500: 600. This is partly based on Mr. Rosenberg's belief that bear markets end about 60 per cent of the way into recessions. He estimates, using an “in-house compass,” that we are just 45 per cent of the way through the current recession, which means that the bear market in stocks shouldn't end until October, in line with his earlier view.
As for how he gets 600, he now believes that S&P 500 earnings will average $50 a share in 2009 and 2010. The index will still trade at 12-times earnings.
“October seems to be the month to circle on the calendar for the possible end-game,” he said. “And remember, markets bottom when fear has overwhelmed long-term resolve, and we will see this in technical barometers such as the put-to-call ratio and the VIX index.”
The VIX index, a widely followed barometer of fear, is sitting at about 50 right now. Some observers believe that it won't spike higher, because capitulation will happen gradually rather than suddenly. However, Mr. Rosenberg disagrees, predicting it will rise closer to 80 when the stock market finally hits its lows.
