Skip to main content

David Rosenberg is not the bear he once was - and he's proving it yet again today.

In the aftermath of the more than 2 per cent plunge in U.S. stock indexes on Monday, the chief economist with Gluskin Sheff has this advice for investors wondering what to do now: just chill.

In traffic signal terms, the current market environment is the colour amber, he says. The green light will return, although it may be quite a frustrating wait.

"Two weeks ago, I said the light was flashing amber but we would see green again at more attractive price levels," Mr. Rosenberg said in his Breakfast with Dave research note this morning. "Red is only saved for recessions, and that is when corrections morph into bear markets. I don't see that on the radar screen. Keep some powder dry, mind you."

Despite the recent pullback in equity markets, Mr. Rosenberg argues that U.S. domestic economic and balance sheet fundamentals are in better shape today than at any other time since the recovery started five years ago.

Known for his often opposing views on the market from the general consensus, Mr. Rosenberg points to a contrarian indicator to provide a signal for when investors should warm back up to stocks: the Investor's Intelligence bull-bear ratio, a weekly survey of newsletter sentiment.

"What the market has to contend with is sentiment levels - let's call it bullish complacency - that hit extreme levels as 2013 drew to a close," commented Mr. Rosenberg. "It was then that Investor's Intelligence bullishness hit a reading of 61.6, which we hadn't seen since the spring of 1987. Consider that on Labour Day it was sitting at 37.1 and you can see what the term 'parabolic' is best applied to. Meanwhile, the bear camp retreated to 15.2 per cent from 23.7 per cent."

When too many investors are getting giddy over stocks, it can be a sure sign that a correction looms.

The green light, he says, may return when the Investor's Intelligence bullish reading falls below 40. It's published every Wednesday, and last week, bullishness was pegged at 53.1 per cent, down from 57.6 the week previous. (Update: its latest reading was published today, showing bulls at 45.9 but bears held relatively steady at 17.4).

"Alas, the fundamentals win out in the end but it is not rare for liquidity, fund flows and technicals to dominate periodically. Plus so much of this is psychological in nature. ... Is the market correcting? Yes. Is this a normal market occurrence? Yes. So what should we do? Chill. Green is going to follow amber ... though it may take a few months."

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe