David Rosenberg Sees S&P 500 Dropping Below 950 in Fibonacci Retracement

The Standard & Poor’s 500 Index may extend its plunge from a 19-month high if it falls below levels watched by analysts who follow the numerical pattern known as the Fibonacci sequence, David Rosenberg said.

The S&P 500 sank 12 percent since April 23, closing at 1,071.59 yesterday, as the benchmark index for U.S. equities suffered the biggest slump since the rally began in March 2009. It slipped to 1,055.90 today. A retreat to 1,044.50, the lowest intraday level of 2010, would lead to more losses, the chief economist at Gluskin Sheff & Associates Inc. in Toronto wrote in an e-mail to Bloomberg News.

“The bulls need these levels to hold,” Rosenberg said. “Corrections after such a massive move up from a depressed low are 20 percent. We could expect to see the S&P 500 still test the 970 level here, with a prospect of a second-order Fibonacci retracement implying a move below 950. Before the last big leg up last summer, the S&P 500 was hovering around the 920 level -- which is my target to begin getting interested again.”

The S&P 500 had risen 80 percent from a 12-year low on March 2009 through April 23 as the government spent, lent or guaranteed at least $8 trillion to stimulate the economy.

U.S. stocks are valued at 19.4 times annual earnings from the past 10 years, according to inflation-adjusted data tracked by Yale University Professor Robert Shiller. That compares with the average of 16.4 since 1881. When the multiple jumped to 21.8 in April, it was the highest end-of-month level since June 2008.

‘More Vulnerable’

“Overvalued markets are more vulnerable than undervalued markets,” Rosenberg said. “The message here is to trade and invest carefully. The equity market is technically oversold right now and due for a near-term bounce, but a rally that would fade if we see it.”

Some analysts who use historical charts and trading patterns to predict the direction of securities say that after a major decline, levels of resistance on the way back up are based on the Fibonacci number sequence described by Leonardo of Pisa in “Liber Abaci” in 1202. Those include the points when a stock or index wins back 50 percent of its initial losses, and when it recoups 61.8 percent.

Rosenberg, the former chief North American economist at Merrill Lynch & Co., the brokerage bought by Bank of America Corp., reiterated his view from a Dec. 10 interview that investors are underestimating risks to the global economy.

The plunge in global equities wiped out $7 trillion of market value between April 15 and yesterday as Germany’s crackdown on speculation, plans for spending cuts by Europe’s most indebted nations and proposals to tighten U.S. finance industry regulation shook investor confidence. The German lower house of parliament approved the country’s share of a $1 trillion lending package to ease Europe’s debt woes, which Federal Reserve Governor Daniel Tarullo said yesterday may pose a threat to the global economy.

“The European debt crisis is certainly the catalyst for this renewed round of risk aversion,” Rosenberg said. “The fundamentals are actually less solid then many on Wall Street are letting on.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.

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