The S&P 500 set a new all-time high yesterday, closing at 3,389 and officially erasing all of its losses from the March sell-off.
This is the third-fastest bull market recovery in history. It took just five months to set new highs after the March 23 lows. It’s also the largest 100-trading day rally in index history. Also, it leaves many investors wondering what’s in store for the markets now that a major milestone has been passed.
Sam Stovall of CFRA Research believes that we could see a modest pullback as investors take profits. “It’s like the messenger from Marathon who crumples from exhaustion after the long run,” said Stovall on a call with CNBC’s Bob Pisani.
Stovall doesn’t expect an immediate correction, however. “No bull market has ever fallen immediately into a new bear market. They typically fall into a pullback or a correction [a 10% decline].”
He expects the S&P to end the year higher, but it will need some help to get there.
S&P Needs a Bit of Help
“We need upward revisions to third and fourth quarter earnings to justify these valuations.” said Stovall. Highlighting that the rally has been fueled by just a handful of stocks, Stovall points out that 40% of the 147 sub-industries in the S&P are still down by double-digit percentages.
“Technically, we’re back to where we were before the sell-off, but there’s still a lot of sectors that are not close to recovering,” said Shawn Cruz, trader services senior manager at TD Ameritrade, echoing Stovall’s comments.
“So if you’re holding a diversified portfolio, you probably still have some positions that are in the red.”
Andrew Slimmon, managing director at Morgan Stanley Investment Management, thinks the market is ripe for a correction.
“There has been a lot of good news seemingly validating” the rally. “But I would argue the market here is very vulnerable to some type of bad news … You look at the type of stocks that have worked, and they’re the higher-risk, higher beta plays,” says Slimmon.
A Correction on the Horizon
Mark Hulbert, founder of the Hulbert Financial Digest and contributor to MarketWatch, says investors’ sentiment is historically bullish. He also agrees with Slimmon that a correction could be right around the corner.
“Conditions are even stronger now for a correction. One big reason is that short-term market timers have become extremely bullish, which is not a good sign from a contrarian perspective.”
Hulbert says of the 100 market timers he follows, the average recommended equity exposure is 65.9%. This is in the highest 5% of readings going back to the year 2000.
Even the “smart” money is overly-bullish according to Bank of America.
The bank’s proprietary Bull & Bear Indicator, where a reading of less than 4 indicates greed and a reading greater than 5 indicates fear, now stands at 3.7.
While we wrote about this excess bullishness yesterday, the fact that bears are throwing in the towel could be another strong indicator that we’ve reached the capitulation point.
Only 53% of investors surveyed by Bank of America think the economy is in a recession. This is compared to almost 90% earlier this year.