S&P’s Stovall: Stock Market ‘Ready for Bounce’

Wednesday, 23 May 2012 07:42 AM

By Dan Weil

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Various factors indicate that stocks are “ready for a bounce” and that declines will be contained, says Sam Stovall, chief equity strategist at S&P Capital IQ.

First, there has been the rally in Treasurys, sending 10-year yields to near record lows.

“People are looking for safety in cash or secure [government bonds], which indicates the risk is very high,” Stovall tells Yahoo.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

But the stock market is still in pullback mode — a decline of 5 to 10 percent.

“Usually we have to wait until a bear market [20 percent drop] before we get such a washout,” Stovall says.

“So we are ready for some sort of bounce.” The Standard & Poor’s 500 Index has slid 7 percent from its April high.

“The lack of speed with which we crossed the 5 percent threshold is intriguing,” Stovall says. Normally it takes 19 calendar days for such a decline, he says. But this time it took 42 days.

Of all the times it took 42 days or more in the past, only one pullback turned into a correction – a market decline of 10 to 20 percent, he says.

So if history’s any guide, there’s a good chance we won’t go beyond a pullback.

The stock market appears to be in the midst of the bounce Stovall forecasts, rising Monday and most of Tuesday before the Dow closed a bit lower.

“We’re getting some refocus back on [positive] economic news,” Michael Strauss, chief investment strategist at Commonfund, tells Bloomberg.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.








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