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A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web

Nomura strategist Masanari Takada sees market sentiment near dangerous euphoric levels,

“The market mood is on the cusp of moving from a period of brewing optimism towards a state of outright euphoria. Once sentiment crosses the line into euphoria, what often unfolds is an “aerial dogfight” featuring the careless use of leverage and a wave of unusually rapidly executed direction trades. The result is the destabilization of the market trend. The standard move in these circumstances is to take profits and/or brace for downside…we think there is a strong element of wishful thinking to hedge funds’ recent buying, which has been underpinned by the upsurge in optimistic sentiment. Also, although the global economy is just showing the first signs of having begun to pick up, hedge funds have built up positions that appear premised on the idea that a V-shaped recovery in the global economy is already in the offing”

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“@SBarlow_ROB Nomura's Takada sees euphoric conditions and an 'aerial dogfight featuring the careless use of leverage"” – (research excerpt) Twitter

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U.S high yield and BBB-rated corporate debt spreads will be among the most important market indicators to follow in 2020 in my opinion. Credit spreads have widened significantly before all but one of the past U.S. recessions (according to Credit Suisse) and signalled the end of bear markets. (Importantly, however, 2016 gave a false alarm).

UBS quantitative strategist Francois Trahan sees major credit stress ahead and if he’s right, investors will have to position more defensively,

“Leading indicators of credit ratings point to an increase in downgrades for stocks in 2020: Lower PMIs in 2019 and the lagged effects of interest rates argue for deterioration in credit ratings and a likely rise in the number of downgrades in the coming year. A decline in S&P 500 forward earnings would likely magnify the credit downgrades coming in 2020: The four largest downgrade cycles of the past 35 years occurred during the four major declines in S&P 500 forward earnings.”

Mr. Trahan presented a compelling chart comparing credit ratings and the ISM manufacturing new orders index that backs up his thesis (links below).

“@SBarlow_ROB UBS warns on U.S. credit” – (research excerpt) Twitter

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“@SBarlow_ROB Huh. This would shake things up (UBS) "Leading Indicators Of Credit Risk Argue That Ratings Are Set To Deteriorate In 2020" – (chart) Twitter

“Euphoria sweeps across Wall Street. How long will it last?” – CNN Business

“@SBarlow_ROB Odds of a blowoff top getting shorter (excerpt from ML)” – Twitter

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Diversion: “The Most Disappointing Gadgets of the Decade” – Gizmodo

Tweet of the Day: “@ReformedBroker These are the top performing stocks of the decade, broken down by sector. How many of these could you have guessed in advance?” – Twitter

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