Stocks: Sounding the Depths

Some thoughts from Wall Street equity strategists on how much longer the stock market will keep falling

by BW Staff

Where's the confounded bottom? With major U.S. stock indexes touching new decade-plus lows in recent days, those investors still resolute enough to be in the equity markets must be asking themselves that question repeatedly. BusinessWeek rounded up some thoughts from Wall Street equity strategists on the current market on Mar. 9, presented here:

Barry Knapp, Barclay's Capital

Our new base case is for the S&P 500 to fall to our original stress case scenario of 640. Our new best case scenario is that we hold near current levels, and our new worst case is that we fall to 585, an outcome consistent with below valuation norms. This time around, we assigned equal weightings to the various outcomes, given our lack of conviction that the conditions are in place for the bear market to end in the near term, while acknowledging that the market has overshot our base case. The probability weighted average of these three scenarios gives us a new year-end price target of 760. While we are in fact more optimistic on equities then we were when we set our initial 2009 price target, we have to acknowledge that the probability of getting to 875 is much lower now.

Despite the fact that the market overshot our base case, and is rapidly approaching our stress case, we were reluctant to revise our forecast for fear of creating the impression that we have become increasingly bearish, when in fact the opposite is true. Still, we wanted to stick to our framework and provide investors with an updated assessment of the U.S. equity market outlook.

Philip Roth, Miller Tabak

The market has nearly moved through the normally seasonally strong period without a breath of a rally. As a result, short-term and longer-term momentum indicators are oversold. While the message of little investment demand is clear, there is actually a bit of good news in that observation. Every year, our seasonally game plan is to look for lows in the spring and the fall or, more precisely, between mid-March and mid-June, and between mid-September and mid-November. In years with little seasonal reinvestment demand (i.e., years with a down January-February period), the spring low usually comes early. But we respect the trend; we do not anticipate the level and timing of a final low. Remember, it is resistance areas that define down-trends, not support areas. We need to see rallies that attract new buying, not more selling. We need to see rallies that surpass resistance levels; that is the technical definition of a reversal to the upside.

Our downside objectives, especially in a bear market making new 12-year lows, are guides, not chiseled-in- stone forecasts. If the sentiment and supply-demand indicators were giving a compelling late-stage bear market or bear market bottom message, we might be inclined to say an important low is at hand. But they do not. If our next objectives are reached or exceeded, and there is still no clear picture of excessive trader pessimism and strong evidence of new investor demand, we will derive new objectives.

Tobias Levkovich, Citigroup

Confidence in future earnings growth is near nonexistent based on our analysis and is closing in to near the lows seen over the past 40 years. In this sense, credit conditions and disappointment with policies thus far are trumping the various fiscal and monetary stimuli. Indeed, 99% of NYSE stocks are at or below their 200-day moving averages. While we maintain our overweight views on the Insurance, Semiconductor, Retailing, Transportation and Diversified Financials industry groups, we are continuing to underweight Utilities, Household & Personal Products, Food, Beverage & Tobacco as well as Autos, to name a few.

While defensive groups have generally fared better under the intense market pressures year to date, we suspect that it is too late to hide in often high expectations and unattractively valued areas. After having been negative on this sector for most of 2008 and market weight for the past few months, the group looks washed out on earnings expectations and valuation is attractive using our analysis. Moreover, Energy typically outperforms from February through September. Not all signals are positive, but evidence suggests that this higher beta group can perform well during a market rally and is no longer likely to disappoint investors significantly. As a result, we are adding Marathon Oil (MRO) and EOG Resources (EOG) to Citi's Recommended List.

Prices for some commodities such as copper have firmed and are being seen as an indication of economic potential, especially in China. However, Citi's Asian strategists seem less than convinced as the Chinese PMI numbers may reflect business optimism that is inconsistent with export trends and port shipment data, not to mention demands for input price cuts from suppliers by producers.

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