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This Most Recent Market Downturn is Needed, Necessary and Creates Opportunities

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This Most Recent Market Downturn is Needed, Necessary and Creates Opportunities

by Adam Adamou, CFA

The S&P TSX Composite Index suffered its greatest one day loss in some time on Monday, after suffering the first losing week in the last three months (if memory serves me). As readers of our weekly Caseridge TechSys Dealbook are aware, we’ve had some concern about the sustainability of the market rally for some time.

Our concern is focused on two primary areas: that the gross profit growth rates priced into the TechSys sectors were too high, having topped off at a 16% annualized rate of growth a few weeks ago. Our estimates called for a growth rate of about 5% for 2009 back in December, that was recently increased to 10% for the next 12 months (to the end of 2Q10). It would appear that the market has collectively decided to reduce their expectations for the coming quarters, moving the market back to an annualized growth rate of 11% as at Monday June 22, 2009.

The second area of concern relates to the market sentiment indicators that we track and have tracked for some time. Market sentiment moved from a Bearish sentiment of over 70% just five months ago to a level of only 8% just a few weeks ago. Just as we spread the alarm back in March when Bullish Sentiment hit an all time low of 2%, on the basis that there really wasn’t much more room to decline when the market expects that 98% of all stocks will *not move higher*, we believed more recently that the assumption that 92% of all stocks would *not move lower* was not a sustainable one.

We’re not sure how much further that the market will retrace before a new bottom is hit, but we do expect to come out of this downturn with a more realistic growth rate assumption priced in to valuations and a more balanced sentiment chart. As of yesterday, it looks like we are beginning to normalize in both valuations and sentiments, a very good sign for the balance of the year – assuming of course that we don’t overshoot again, and if we do you can be certain that we will be here with a well timed rant to make sure that you are aware of that.

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