Market Insider

What Pullback? Stock Rally Still Has Legs, Strategists Believe


Stock strategists are still seeing up arrows when it comes to this market.

One of the hottest debates on the Street these past three or four weeks is how much further the bull can run before it runs out of steam.

Many traders believe a pullback is inevitable and for some, this week is as good as any for that to happen, given recent low volume of trading.

Inside the New York Stock Exchange.
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But several strategists say in notes that they see stocks still moving higher. Citigroup's stock strategist Tobias Levkovich warns the market's naysayers could be proven wrong, and this could be an above-average bear market rally.

The rally gained strength on Monday amid optimism about the US economy. The S&P 500 rose 3.4 percent to 907, above the key 903 level, which put it in positive territory for the year for the first time. The Dow finished up 2.6 percent at 8426. The S&P financial sector was 10 percent higher and was the best performing group.

Goldman Sachs strategists said they see progress on a number of economic fronts and are now boosting their exposure to cyclical stocks. Laszlo Birinyi says, if you look at history, it looks like the market's still moving higher.

Citigroup's Levkovich, chief U.S. equities strategist, said the investment community is "almost shocked" by the near 30 percent rise in the S&P 500 since early March.

He said the case is building for a second half recovery, and many investors are ignoring the fundamentals. Since early March, financials have risen 74 percent; cyclical consumer discretionary have jumped 46 percent; industrials gained 44 percent and materials are up 41 percent. Meanwhile, the defensive sectors are underperforming.

Levkovich said a few metrics have encouraged him, including the prospects for a likely earnings recovery for late 2009 and 2010, and an improvement in bank lending standards, likely by late 2009. Another positive is a likely moderation in inventory reduction, which would create a production pickup and that would help earnings.

Also, a higher stock market could also boost consumer confidence. For that reason, the market has a good chance of seeing a better-than-average bear market rally.

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The average one-year bear market rally off of the bottom has risen more than 43 percent and it's likely, there is still room to go higher. Another factor is that there are lots of investors who missed the moves and are sitting with large cash hordes.

Laszlo Biriniy says the market's 53-day gain and 10 percent move above the 50-day moving average are second only to the market's performance in 1933. He also says in a note that the net advances over the past 10 days are the third strongest ever, but he sees a case for even more gains.

For instance, only 29 percent of the S&P 500 are above their 200-day moving average. But the most stunning indicator he mentioned was that the number of days to the first correction in previous bull runs is 194 days, and we are only at day 53. One factor that takes away from his thesis is that almost half of the S& P are now up 50 percent from their 52-week lows.

Goldman stock strategists, meanwhile, boosted their exposure to cyclicals because of signs of improvement in several key areas. The strategists say corporate access to credit is improving, housing is showing signs of stabilization and there is a decline in the write downs and provision at financial firms.

They also said that the patterns in previous bear market bottoms would support a heavier cyclical tilt. They acknowledge that they are late to buying cyclicals, but they said they knew that would be the case because the market tends to punish early rotations into cyclicals. Their year end target is 940 on the S&P.

And finally, I talked to Brown Brothers Harriman's Brian Rauscher, a long-time bear who turned bullish in early March. He was concerned last month that the market could be showing signs of moving too far, too fast. But today, I asked him in an email if he's still thinks the market will go higher. He answered: "May have take a deep breath to get through 900 (a day or so), but this market is moving higher.."

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