This post was taken from our December 4th weekly report.

We wrote last week about the absence of bottoming signals for the S&P. From a price perspective, there was little to suggest a sustainable rally was on the cards, as few of the usual signs of selling exhaustion prior to a bounce were present. However, a backtracking Powell speech last week and last weekend’s (likely temporary) detente in the US-China trade dispute have allowed equities to recover some of their previous losses, which brings the current correction episode back in line with the average of the previous three corrections (top-left chart).

Consensus seems to be forming around a seasonally-supported “Santa” rally into year end, and we have had a Post-crash Relief Rally signal that would corroborate this. Nonetheless, the headwinds for an extended rally that is not ultimately sold are formidable. Strategist estimates for 2019 are the most bullish they have been since 2009, looking for an 11% rise to 3056 in the S&P (Bloomberg). Margin debt, which is leveraged (up to 2x) money for equities has begun to fall, while unleveraged, mainly retail money (ETFs) has not shown any signs of capitulation yet, and thus has scope to deleverage (bottom-left chart). Finally, global economic and liquidity conditions, as encapsulated in our Economic Harbinger Index (last chart), point to more weakness ahead for DM and US equities.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception