‘Euphoric’ Indicator Shows S&P 500 Poised to Fall: Chart of Day
U.S. stocks are set up for a fall now that the Standard & Poor’s 500 Index has almost doubled in less than two years, according to Pierre Lapointe, a global strategist at Brockhouse & Cooper Inc.
The CHART OF THE DAY displays an indicator that Lapointe used in reaching this conclusion: a so-called relative strength index for the S&P 500, based on the benchmark’s weekly closing values. The RSI calculations use 14 weeks of data.
Yesterday’s reading of 75.48 was the highest since March 2004, according to data compiled by Bloomberg. When a relative strength index rises above 70, it’s a sign that investors have rushed to buy the underlying asset -- stocks, in this case --and a decline is coming soon.
“Sentiment is almost euphoric, with very few skeptics remaining,” Lapointe and Alex Bellefleur, an economist, wrote today in a report. The degree of optimism among investors “is leading us to be slightly more cautious.”
Brockhouse recommended that clients reduce their holdings of stocks by five percentage points, to 60 percent, and increase their bond investments by the same amount. The firm maintained a 5 percent allocation to cash.
The S&P 500 climbed yesterday to more than double its March 2009 intraday low, and peaked at 1,337.61. The index must close at 1,353.06 or higher to reach the same milestone relative to its closing low from that month, when the most recent bear market ended.
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To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net
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