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There are contrarian indicators and then there are contrarian indicators — and then there’s Albert Edwards, the pessimistic Societe Generale market analyst who thinks his dethronement as the top-ranked advisor in one survey is a sign that investors ought to watch.
In an analysis both cheeky and self-deprecating, the longtime market bear laments his loss of standing after 15 years on top in the European Extel poll and figures it must mean that the record-breaking bull market run is coming to an end. Edwards’ team at SocGen ceded the top spot for global strategy to a JP Morgan team led by Mislav Matejka.
In a note to clients, Edwards said he’s taking the defeat “in a positive way” as he figures “the toppling of this uber-bear from his perch must surely mean the equity bear market has begun.”
He points to other contrarian points, like Business Week’s 1979 cover article titled “The Death of Equities” that appeared just before the roaring 1980s bull market began, as similar signposts for an unexpected turn in the market. He also related a story in 2009 where he gave a presentation inside a Broadway movie theater to a full house, just before the current bull market began.
“These anecdotal contrary indicators are sometimes worth far more than all the hundreds of millions of dollars that is spent on fundamental macro research,” Edwards wrote.
“And so we should celebrate the loss of my number one spot. More than any other sophisticated leading indicator, it gives clients a clear signal that in all probability, this equity cyclical bull market has ended and the resumption of the secular bear market has begun as a deep, deflationary, Ice Age recession unfolds,” he continued. “Of course, my being made fired would be a 100% slam-dunk signal, but that has not happened … yet!”
Turning more serious, Edwards said there are legitimate signs that he bull market is ending.
One of the big ones he cites is an inverted yield curve following Federal Reserve monetary tightening that was far more severe than the current central bank benchmark rate of 2.25%-2.5% might suggest. In fact, the Fed was tightening from real rates of -3%.
“Being a simple soul, I believe all the inversion of the yield curve tells us is that the Fed has raised interest rates considerably. This often coincides with inversion, especially when the bond market starts to sniff the sickly aroma of an economy slipping away into a recession,” he wrote.
“Investors may be underestimating though how long ago the yield curve inverted and hence how imminent is the recession,” Edwards added.
Stocks have been rallying the past two days since Fed Chairman Jerome Powell and others made remarks interpreted as signaling an imminent rate cut. Edwards advised heeding the signs and watching closely for when the Fed actually does act.
“Is it too late to sell?” he wrote. “Equities will likely rally on the first Fed rate cut. But that might prove to be the last chance to sell before the deathly grip of recession crushes the Dow.”