Market Talk

This guy's getting tired

Many market observers predict tops and bottoms, but few successfully get their timing right. Jeremy Grantham and Barry Ritholtz sit in the latter category, so when they offer their forecasts, investors would be wise to take note.

Grantham, the chief investment strategist at GMO, predicted in March that a stimulus-fueled rally would lift the S&P 500 to 1000-1100. Now that his prediction has been fulfilled, he’s turned sour on the stock market and many facets of the economy.

He blasts the continued employment of people like Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner (“like reappointing the Titanic’s captain for facilitating an orderly disembarkation,”) the home-buyer credit (“blatant vote-buying by Congress,”) overpaid executives (“unjust desserts”) and the “well-managed” auto industry.

But he’s not surprised by the market rally.

“The lessons, if any, are that low rates and generous liquidity are, if anything, a little more powerful than we thought,” he says.

And even amid a “profound” failure of the financial system, and weak public leadership that missed problems like the housing bubble it should have seen, the biggest problem is that the banking system has simply gotten too large, Grantham says.

“The only long-term hope of avoiding major recurrent crises is to make our financial system simpler, the units small enough that they can be allowed to fail, and, above all, to remove the intrinsically conflicted and dangerously risk-seeking hedge-fund heart from the banking system,” he says. “The rest is window dressing and wishful thinking.”

So despite the low rates and liquidity, Grantham believes stocks at current levels are overvalued by about 25%. He doesn’t expect the S&P 500 will re-test the early-March low of 666, but does expect stocks to fall at least 15%.

After two consecutive days of triple-digit declines, the Dow Jones Industrial Average has jumped all over the place on Tuesday, rising as much as 80 points while also falling as much as 30.

Prior to today, stocks have dropped four out of the last five sessions, but major indexes are only 2% off last week’s 2009 highs.

While it may not look like it right now, this rally may actually be wearing itself out, says Barry Ritholtz, CEO at FusionIQ.

“I am now starting to pull in my horns a bit, as this rally looks to be getting a little tired and showing signs of technical deterioration,” he writes at The Big Picture.

Ritholtz is a well-known contrarian who predicted in early March that a big bear-market rally was coming. He’s been bullish ever since, but now seems to be slightly changing his tune.

Stocks may still hit new highs, but he sees a correction coming, albeit not as steep as Grantham’s prediction. Ritholtz, who sees stocks pulling back in the 5%-15% range over the next 60 days, lists five factors that make him more cautious.

1) Over the past 4 days, there have been three failed rallies;

2) The number of new highs on the major indexes is contracting;

3) Stocks seem to be reacting far less enthusiastically to earnings beats then they had been;

4) The Transports have been acting “squirrelly” lately;

5) The S&P is forming an “ascending wedge.”

“This is not a major call, it looks to me like more of a minor reversal,” he says, as near-zero percent rates will continue to stimulate the market.

DJIA was recently up 26 at 9894.

(Paul Vigna contributed to this post.)

(Photo: Library of Congress)