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From the always informative (and unwavering bear) David Rosenberg:

(i) Volume fell sharply to close out the week. In fact, three of last week’s five up-sessions were on lower volume which calls for caution.

(ii) Leading stocks are not breaking out, according to the Investor’s Business Daily (IBD) list.

(iii) The only buying seems to be short covering (in the last two weeks of September, short interest on the NYSE plunged 3.4%).

(iv) While Q3 S&P 500 operating EPS is seen improving to -23.8% YoY from -31.0% in Q2, the IBD runs with a story showing that outside of financials (where the new accounting rules allow them to hide losses), the YoY trend is actually little improved at -29.0%. Outside of financials, only consumer discretionary EPS is destined to show an increase (of 23.0%) but that had to do with Ford’s massive loss. Basically, the current YoY earnings season is telling you more about Q3 of last year then anything else.

(v) The hurdle bar to beat expectations has been raised now that analysts have raised their estimates for 641 companies in recent weeks and lowering just 383 (largest differential in favour of the positives in two years – see Kopin Tan’s ‘The Trader’ column on page M2 of Barron’s).

(vi) CEOs are not as pessimistic as they were earlier in the year, but they certainly do not see the V-shaped economic recovery now apparent in equity market valuation. According to a Duke University/CFO Magazine poll conducted in September, more than half of businesses say they will not return to pre-recession staffing levels until 2012; fully 43% still plan to cut payrolls in the next 12 months.

I still don’t see the fundamentals or valuation as compelling bullish factors and the market looks bought, based on the 20% gap between today’s price and the 200-day moving average; however, there does seem to be an array of other technical indicators (the 52 week new high/new low list) that are supportive over the near-term. I would have to say that until we manage to see this series of interim highs manage to fail, the technicals can still manage to take the market higher. So keep an eye on whether we break the September 22 high. If we do, then everyone will be talking about a 50% retracement possibility, which then sets the S&P 500 up for a test of 1,120.

We should also mention that we were ending off last week with a massive 734 stocks hitting new 52-week highs and 32 hitting new lows. Three sectors, according to the IBD, are very prominent in this 52-week high group, which include golds, retailers and oil & gas equipment. And, while it may be early days, we are seeing some tentative signs of improved revenue results — of the 19 large-caps that have reported thus far, nine beat top-line estimates, nine missed and one met (and 16 of the 19 beat their profit estimates — surprise, surprise). As Kopin Tan reports, of the total universe of stocks, 168 have reported thus far and 71% have beaten estimates — and those that beat saw their stock prices rise an average of 2.4% the following session; those that missed views posted a following-day drop of 4.5%. Those only meeting their targets lost 3.6% so the market is becoming more discriminating, at the margin.

Our major strategy remains one of steadfastly focusing on risk-adjusted returns, respecting capital preservation and the need for income in the portfolio, especially for our more mature clients. Great article on the need for a demographic overlay in any strategy on page A9 of Monday’s IBD and the sophisticated private investor realizes this — see Baby Boomers Eye Retirement Income. And portfolios have to be protected against the prospect of a much more pronounced depreciation of the U.S. dollar (and correspondingly, a stronger Canadian dollar) — see the editorial on page 6 of the weekend FT (A Strong U.S. Needs a Weakened Dollar). Also see the commentary on page 9 of Monday’s FT (The Case for a Weaker Dollar).

Buy gold.

Good stuff.

Source: Gluskin Sheff

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