Stock Surge in U.S. Is Unlikely to Last, DeGraaf Says: Technical Analysis
The biggest rally in almost two months in the U.S. stock market yesterday was missing the hallmarks of a move that’s likely to last, said Jeffrey deGraaf, the top-ranked technical analyst.
The market’s trend turned negative in July and remains so in September, historically the worst month for stocks, deGraaf said in an interview. Equities aren’t “oversold,” and while investor sentiment has deteriorated, it hasn’t reached a pessimistic extreme, he said.
“It’s noise,” deGraaf said of the advance yesterday. “I would be more encouraged if volumes were heavier, if sentiment had reached what I thought was a capitulative extreme. Admittedly it’s choppy, but I don’t think it’s for real.” DeGraaf, a senior managing director at ISI Group Inc. in New York, has been the No. 1 technical analyst in Institutional Investor’s annual survey for five straight years.
The Standard & Poor’s 500 Index climbed 3 percent yesterday to 1,080.29, its biggest gain since July 7, after better-than- estimated growth in U.S. and Chinese manufacturing bolstered confidence in the global economic recovery. More than 8.51 billion shares changed hands on U.S. exchanges, compared with the daily average of 9.08 billion in 2010.
DeGraaf says the S&P 500 may fall 11 percent to 960 this year. The worst bear market since the Great Depression drove the index as low as 676.53 in March 2009, a 12-year low. The main benchmark for American equities is down 3.1 percent for the year after a rally stalled in mid-April at 1,217.28.
Not ‘Oversold’
For the market to experience a sustained rebound, it probably has to suffer more, deGraaf said. A measure of whether the market is “oversold,” the percentage of S&P 500 stocks trading above their 50-day average price, was 29 percent yesterday, he said. Markets on the verge of a big rally normally have a reading of less than 10 percent, he said.
Investor sentiment is better than at the start of previous rallies, according to trading of bearish equity options relative to volume in bullish options, deGraaf said.
Another measure of sentiment -- a weekly analysis by Investors Intelligence of investment newsletters -- found that in the week ended Aug. 31 the bullish percentage of authors fell to the lowest level since March 2009.
The S&P 500 has fallen 0.7 percent on average and the Dow Jones Industrial Average dropped 1 percent since 1950 during September, making it the worst month of the year, according to the Stock Trader’s Almanac.
A portion of yesterday’s advance probably was caused by investors shifting from bonds to stocks after the S&P 500’s biggest August slump since 2001 and the largest rally in the U.S. Treasury market since March 2009, deGraaf said.
“It’s not consistent enough to play, but you can get some pretty big swings because it’s the first day,” he said. “Given those conditions, we require a higher bar than normal just to get interested. We need to see at least another day of substantial momentum.”
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net
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