S&P 500 Breadth Signals Smaller U.S. Retreat: Technical Analysis
The breadth of the U.S. stock rally has persuaded Bank of America Corp.’s Mary Ann Bartels to scale back her forecast for losses in the Standard & Poor’s 500 Index.
The cumulative advance-decline line for stocks trading on the New York Stock Exchange, which represents the number of daily gains minus the number of declines, surpassed its November high last month, a sign of the rally’s strength, said Bartels, the New York-based head of technical and market analysis at the firm. Investors should buy the largest stocks on a dip that may occur in the next two months, she said.
The S&P 500 has climbed 5.3 percent to 1,324.09 in 2012 as investors gained confidence European leaders will be able to stem the region’s debt crisis. The benchmark gauge for U.S. stocks has rebounded more than 20 percent from its in October low of 1,099.23. Bartels had said on Dec. 27 the S&P 500 probably would retreat near that low before gaining in the second half of 2012. Now, she sees the measure dropping to between 1,200 and 1,250.
“There’s enough cash on the sidelines for stocks to go up” in 2012, she said in a phone interview on Jan. 31. “Most investors have missed the rally, which is bullish for the market.”
Shifts in money flows out of bond funds and into equity funds may fuel further gains, according to Bartels. Customers of U.S. mutual funds have pulled about $102 billion from stock funds since December 2010 through November, while adding $114 billion into bond funds, according to the Investment Company Institute in Washington.
Asset Allocation
“What we’re looking for is an asset allocation out of bonds and into stocks,” she said. “This rally has been fueled by cash in our view, not by asset allocation change. If you got an allocation out of bonds into stocks, that would power the market up for sure.”
While the S&P 500 may experience a correction between February and March, potentially falling as low as 1,200, investors should buy the largest U.S. companies that offer growth and yield during the dip, Bartels said.
She recommended stocks in the Nasdaq-100 Index (NDAQ), which rose to 2,488.18 yesterday, the highest level since February 2001. The gauge has jumped 9.2 percent in 2012, as computer and software makers have exceeded fourth-quarter earnings estimates by more than any other industry and Apple Inc. posted record profit and sales on Jan. 24.
Investors seeking yield should purchase the worst- performing stocks in the Dow Jones Industrial Average (INDU) that pay above-average dividends, a strategy known as “The Dogs of the Dow,” Bartels said. Verizon Communications Inc., Procter & Gamble Co. and Chevron Corp. have declined at least 3.3 percent this year for the biggest declines in the gauge. The Dow’s current payout ratio is 2.5 percent, compared with the S&P 500’s 2 percent dividend rate and Russell 2000 Index’s 1.4 percent yield.
To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
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