This Stock Market Rally Can’t Be Trusted. Here’s Why.

But can stocks keep rising? Rosenberg has his doubts. In a report released Wednesday morning, he calls the market’s rally “rather junky” and offers three reasons why: earnings, short covering, and breadth.

Third-quarter earnings have actually been pretty good, but guidance has not. Estimates of fourth-quarter earnings per share have dropped 4%, with eight out of 11 sectors experiencing downgrades. Of the 75 companies that have issued guidance, 64% have provided downbeat forecasts.

And it’s not like the rally has been driven by the companies with strong fundamentals. Instead, the biggest gainers have been the most-shorted stocks, Rosenberg says, as well as those with weak balance sheets, what he dubs “non-profitable tech.” This is a sign that “this is a reflexive
increase driven by technicals and complacency, rather than any fundamental strength. Hence, there are more reasons to be cautious,” Rosenberg says.

Finally, Rosenberg notes that small-cap stocks aren’t participating in the rally, The
Russell 2000
has dropped for two straight days. And while the monthly returns have been fine—the index has risen 4.3%, just a touch below the S&P 500’s 4.4%–they’re still down 1.6% for the year to the S&P 500’s 14% and the Nasdaq’s 30.3%. That 32 percentage-point gap between the Nasdaq and the Russell is “the largest in the last two and a half decades and was last seen in the lead-up to the Dot-Com bubble,” Rosenberg writes.

Rosenberg, of course, has a reputation for leaning bearish, so his argument should be looked at through that lens. Still, It’s a reminder that just because a market has short-term momentum, doesn’t mean it will keep going.

Write to Ben Levisohn at [email protected]