JPMorgan Chart Bull Joins Erlanger in Support of Stocks Rally

Michael Krauss, the JPMorgan Chase & Co. analyst who correctly predicted the bottom of the 2007-2009 bear market in U.S. stocks, said the rally that has started since then is unlikely to end with the rout this month.

His view was shared by Phil Erlanger of Phil Erlanger Research Inc., who said the advance will resume after the bull market experienced its first correction, or decline of at least 10 percent, since March 2009. Erlanger predicted the Dow Jones Industrial Average will rise to its 2007 record next year.

“Everybody thinks that we’re going to crash and we’ll make new lows. I think they’re going to be wrong,” Krauss said in a panel sponsored by the Market Technicians Association in New York yesterday evening. “You don’t correct a 13-month trend, if you think it’s the first leg of a large bullish trend.” Technical analysts study charts of trading patterns and prices to predict changes in stocks.

The Standard & Poor’s 500 Index has surged as much as 80 percent from a 12-year low after the U.S. economy returned to growth. The benchmark yesterday entered its first correction during the rally, plunging 12 percent from a 19-month high on April 23, after reports cast doubts about the strength of the economic recovery and European leaders struggled to contain the region’s debt crisis.

At yesterday’s close of 1,071.59, the S&P 500 was 24 percent below its level 10 years ago, just after the peak of the Internet bubble, and 3 percent above its closing price on the first trading day after the Sept. 11, 2001, terrorism attacks. The benchmark rose 0.9 percent to 1,081.45 as of 11:34 a.m. in New York.

‘Cheap’ Stocks

“This is either a depression-like event, or we’re not likely to see stocks so cheap again in our reasonable lifetime,” Erlanger said. “I don’t see it just yet” being a depression.

Erlanger based his projection the Dow average may reach its Oct. 9, 2007, record of 14,164.53 on the Fibonacci theory that says stocks tend to recoup all their losses after erasing a 50 percent decline. The Dow average first recovered half its bear-market retreat on Nov. 16.

Another bullish indicator he cites is that the Dow Jones Transportation Average held above its 2003 low during the most recent bear-market slump, even as the industrial average sank to a 12-year low. According to Dow Theory, developed by Wall Street Journal co-founder Charles Dow in the 1800s, moves by the industrial average must be “confirmed” by the transportation average to last.

Bull Market

Sam Stovall, chief investment strategist at Standard & Poor’s, advised investors to stay in stocks because the bull market may have more room to go. Based on his study of the past 60 years of stock-market movements, no bull market lasted fewer than 26 months and on average, one correction took place during the second year of the bull market. The current bull market began in March 2009.

Louise Yamada, managing director of Louise Yamada Technical Research Advisors LLC, said yesterday there are indications that the market may experience bigger losses.

“A cyclical bear may take place in 2010. Today may have been the beginning,” Louise Yamada, managing director of Louise Yamada Technical Research Advisors LLC said. “Enough stocks have been damaged in this decline to suggest that those particular stocks should be sold into the rally.”

The S&P 500 and the industrial average this week sank below the average during the past 200 days and lost ground at their 50 percent retracement of the 2007-2009 decline. The NYSE Composite Index, which tracks all stocks on the New York Stock Exchange, yesterday dropped below its Feb. 8 low.

Krauss, who in November 2008 projected the S&P 500 would sink to 650 and then called for the subsequent rally in March 2009, agreed that more losses may lie ahead, with the S&P 500 dropping to as low as 950. Still, he said the market will take off again in the second half of this year.

“We are going to be in correcting process for three to five months,” he said. Investors should “come down to the long side in July and August.”

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