Bulls Rising Amid Stock Rout Signals Losses: Technical Analysis

Newsletter writers became more optimistic about stocks amid the biggest slump in the Standard & Poor’s 500 Index since 2008, a sign the market retreat may not be over, according to Miller Tabak & Co.’s Peter Boockvar.

The proportion of writers who are bullish on equities increased to 47.3 percent from 46.3 percent in the week ended Aug. 9, while bears fell to 23.7 percent from 24.7 percent, according to a report from New Rochelle, New York-based Investors Intelligence yesterday. The S&P 500 fell 7.2 percent in the week ended Aug. 5, the most since November 2008, Bloomberg data show.

Analysts who study charts to predict markets view more optimism as a contrarian sign because investors may have bought shares and have less money to invest. The S&P 500 extended its decline this week, including a 6.7 percent drop on Aug. 8, the first session after a downgrade of the U.S. credit rating by S&P stoked concern that the nation’s economic slowdown may worsen.

“One thing last week’s 7.2 percent decline in the S&P’s didn’t do was shake the confidence of newsletter writers,” Boockvar, a New York-based strategist, wrote in a note yesterday. “This reflects a clear buy-on-the-dip mentality,” he said. “Bear markets don’t bottom with more bulls than bears.”

The S&P 500 plunged 18 percent from an almost three-year high on April 29 through Aug. 8. The next day, the benchmark gauge rallied 4.7 percent after halting its slide intraday within a half percentage point from 1,101.73, a level marking the erasing of 38.2 percent of its entire gain during the bull market that began in March 2009, according to Bloomberg data. The threshold is part of Fibonacci chart analysis, which attempts to identify points where losses may gain momentum or reverse. The S&P 500 fell 4.4 percent to 1,120.76 yesterday.

‘Violent Rallies’

“While some may say we’re not in a bear market yet, the two main characteristics of one are oversold markets that get even more extremely oversold and secondly are followed by violent rallies that don’t last long,” Boockvar said.

The 14-day relative strength index for the S&P 500, which identifies possible turning points by measuring the degree to which gains or losses outpace the other, dropped to 16.5 on Aug. 8, the lowest level since September 2001, according to data compiled by Bloomberg. Readings have stayed below 30, a level seen as evidence that stocks have fallen too far too fast, in four out of the past five days.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net

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