S&P 500’s 5% Pace Hints ‘Contained’ Pullback: Technical Analysis

The Standard & Poor’s 500 Index (SPX) took longer than usual to fall 5 percent from its peak this year, a sign that any further retreat in U.S. stocks will be “contained,” according to Sam Stovall of S&P.

The benchmark gauge reached the threshold yesterday after spending 28 days without losing 5 percent from its April high. Since 1950, it has taken an average 19 days to fall 5 percent, based on a study by Stovall, S&P’s New York-based chief equity strategist. Among those that took 28 days or longer to occur, only 25 percent eventually turned into corrections, or retreats of more than 10 percent, the data show. Stovall said in an e- mail that he views losses of less than 5 percent as “noise” and those of between 5 percent and 10 percent as pullbacks.

“The duration of this ‘noise’ likely indicates that the ultimate decline will be contained, unless new worries emerge or existing concerns become increasingly intensified in the coming weeks or months,” Stovall wrote yesterday. “The market will eventually bottom in a ‘pullback’ mode.”

The S&P 500 has fallen 5.7 percent from its four-year high in April amid concern Europe’s debt crisis is worsening. The index fell to a three-month low yesterday as Greece struggled to form a new government, spurring speculation the nation may leave the euro region.

Concern that European officials would fail to contain the region’s debt crisis helped trigger the bull market’s biggest retreat last year. The S&P 500 plunged 19 percent from April 29 through Oct. 3, 2011, as Moody’s Investors Service cut its credit ratings on Portugal and Ireland to junk levels. The index has since surged 22 percent amid better-than-expected U.S. economic data and corporate earnings.

Stovall sees the S&P 500 reaching 1,450 over the next 12 months, or an 8.3 percent gain from yesterday’s close of 1,338.35.

“Investors should stay the course and ride out what we see as a seasonal slowdown,” he said.

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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