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Bulls at Highest Since May Spurs S&P Concern: Technical Analysis

The 12 percent rally in the Standard & Poor’s 500 Index since November has pushed optimism to a level last seen when the U.S. stock market began its biggest retreat since 2009.

The proportion of investment newsletter writers who are optimistic on equities rose to 51.1 percent this week, the highest since May, according to a report from New Rochelle, New York-based Investors Intelligence yesterday. Last year’s peak in bullishness was just before the market’s top in April.

Some analysts say sentiment serves as a contrary indicator given that optimistic investors have already purchased shares, leaving less money to help drive prices higher. The S&P 500 has climbed in four out of the past six weeks, touching a five-month intraday high of 1,296.46 on Jan. 10, as data on manufacturing and employment raised optimism the world’s largest economy will weather Europe’s sovereign debt crisis.

“Sentiment is getting more extreme,” Arthur Huprich, an analyst with Raymond James & Associates Inc., wrote in a note yesterday. “Trading will remain choppy, especially as overhanging selling pressure looms.”

Bulls reached 57.3 percent on April 5, 2011. At the end of that month, the S&P 500 hit its 2011 peak at 1,363.61 before plunging as much as 19 percent through October. It has since jumped 18 percent to 1,292.48.

Michael Krauss, head of technical research at JPMorgan Chase & Co., said S&P 500 faces “resistance” at the 1,305 to 1,318 range. A failure to break through these levels may lead to a loss of 50 to 100 points in the S&P 500, he said.

“The sentiment in the market is somewhat hopeful, but there is a lot of fear in the background,” he said in a telephone interview yesterday. “I’m not expecting a crash, but I could see a risk-off trade in February, March.”

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