Sentiment Near August Low Means Stock Gains: Technical Analysis
The rebound in the Standard & Poor’s 500 Index isn’t over because when pessimism about the market was this high in August, equities rose in five of the next six months, said Bay Crest Partners LLC.
The benchmark index for U.S. equities slipped as low as 1,249.05 on March 16 amid concern rising energy costs will hurt global economic growth and Japan’s 9.0-magnitude earthquake may tip the world’s third-biggest economy into recession. The next day, the weekly survey from the American Association of Individual Investors showed the ratio of bulls to bears fell to 0.71, the lowest since Aug. 26, Bloomberg data shows.
Christian Bendixen, director of technical research at Bay Crest, said the increase in pessimism may reverse and help the S&P 500 climb to 1,425, or 7.3 percent above yesterday’s close of 1,328.26. Technical analysts regard investor sentiment as a contrarian indicator, with pessimism signaling investors may have more cash available.
“It’s a positive thing that this negative sentiment has returned,” Bendixen said in an interview. “The last seller got out of the market and that’s how markets reverse, when there is an exhaustion of sellers.”
The bearish sentiment on Aug. 26 coincided with a bottom for the S&P 500. The benchmark rose in five out of the following six months, rallying 28 percent to a 32-month high on Feb. 18. Since its 2011 low on March 16, the S&P 500 has climbed 6.3 percent.
Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
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