Birinyi Sees S&P 500 at 1,500 While Warning on Trading Risks
The Standard & Poor’s 500 Index may rally to 1,500 this year even as investors contend with rising risks created by modern market structure, said Laszlo Birinyi, president of Birinyi Associates Inc.
Stocks in the benchmark gauge for American equities may advance about 6 percent from yesterday’s close as the bull market that began in March 2009 persists, the former Salomon Brothers Inc. equity trader said in a note to clients. In a separate report, he said markets are increasingly disrupted by “electronic trading and all of its ramifications.”
Birinyi, founder of the Westport, Connecticut-based research and money-management firm, reiterated the bullish call on shares that he has made since the S&P 500 began its 108 percent rally 3 1/2 years ago. His analysis is based in part on a comparison to past bull markets that started with gains such as the 29 percent advance during March and April 2009.
“If this market continues to track history -- and to date nothing has been a better guide -- we could see 1,500 before year end,” wrote Birinyi, who advised clients to buy equities before they bottomed in March 2009. “We like the market in part because it is a bull market. The day-to-day commentary is all good and fine for information but the reality is that in a bull market stocks go up.”
The S&P 500 fell 0.7 percent to 1,400.58 at 11:17 a.m. in New York. It rose 2.3 percent in August through yesterday, on track for its third straight monthly increase. The benchmark gauge for U.S. equities has climbed 12 percent this year as global central banks have taken action to boost economic growth.
Birinyi is updating his forecast from the end of July when he said the S&P 500 would probably reach 1,380 within the next few months and rally from there. He cited the resilience of stocks despite disappointing economic data from China and Europe, strong bearish investor sentiment as a contrarian indicator, and July’s better-than-estimated U.S. jobs report.
His other note highlighted the growth of high-frequency trading and said the emphasis on speed may jeopardize the stability of U.S. markets, citing mishaps such as Knight Capital Group Inc. (KCG)’s unintended buying and selling earlier this month.
“While positive on the market, we are pessimistic regarding the industry,” Birinyi wrote. “The potential for adverse events not only exists but is increasing.”
Knight lost $440 million in less than an hour on Aug. 1, compelling it to seek a rescue from a group of investors led by Jefferies Group Inc.
The initial public offering of Facebook Inc. (FB) on the Nasdaq Stock Market in May was marred by delays and malfunctions, while Bats Global Markets Inc. withdrew its own IPO in March after it failed to get shares to trade properly on its own exchange.
The growth of electronic trading over the last 15 years is the result of advances in technology, the decreasing cost of computers and changes in regulation by government agencies such as the Securities and Exchange Commission aimed at providing savings to retail investors.
“We submit that the SEC’s ambitious intent of creating a level trading field and ’democraticizing’ investing has been overwhelmed by the world of dark pools, high-frequency trading, trading mischief and self-serving instruments,” Birinyi wrote.
The benefits of computerized venues are limited for retail investors, Birinyi said, while questioning merits cited by proponents of the new technology such as faster execution at a lower cost and with more liquidity.
“Trading platforms have expanded, new instruments have proliferated and the individual investor is infrequently seen,” he wrote. “As for the individual, the saturation of exchange- traded products has certainly not increased his confidence or opportunities.”
While almost all stock transactions in the U.S. used to be handled by three exchanges, regulations to increase competition and reduce costs have fragmented markets across about 50 different venues, raising concerns about integrity when the computers that increasingly dominate trading malfunction.
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