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S&P 500 Due for Pullback, Strategas Says: Technical Analysis

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Jan. 14 (Bloomberg) -- The Standard & Poor’s 500 Index is poised to drop 5 percent in the next several weeks, according to Strategas Research Partners.

Indications that demand for U.S. stocks is easing after a 8.9 percent advance by the S&P 500 from Nov. 30 through Jan. 12 include elevated gauges of investor bullishness, Christopher Verrone, head of technical analysis at Strategas in New York, wrote. Low volume in bearish stock options relative to bullish ones and low stock-market volatility are other signs that buyers of stocks may be exhausted, Verrone said.

Historically, February has been a difficult month for stocks, with the S&P 500 averaging a loss of 0.3 percent during the month since 1928, the Jan. 12 report said. Setbacks for emerging markets including India’s Sensex and Brazil’s Bovespa may foreshadow U.S. declines, Strategas said.

“Given this backdrop, we would anticipate that the S&P 500 will test the newly formed support base in the 1,200 to 1,220 range before buyers step back in and the longer-term trend resumes,” Verrone wrote. The index is likely to top 1,400 this year, he said.

The S&P 500 closed at 1,283.76 yesterday, falling from its highest since August 2008. It has regained about two-thirds of its loss after tumbling as much as 57 percent from its October 2007 all-time high of 1,565.15.

The four-week average of the bullish percentage of investors in a weekly poll by the American Association of Individual Investors rose to 56 percent this week, the highest since December 2004. In a weekly analysis of investment newsletters by Investors Intelligence, the bullish percentage has exceeded 50 percent for nine straight weeks, the longest streak since November 2007.

The Chicago Board Options Exchange Equity Put/Call Ratio, which compares volume in bearish to bullish options, averaged 0.5 percent over the five days through Jan. 7, the second-lowest reading since April. The S&P 500 fell 16 percent from April 23 to July 2.

The CBOE Volatility Index, which reflects the cost of using U.S. stock options as insurance against S&P 500 declines, has averaged 17.3 over the past 30 days, the lowest since May.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net