Bloomberg News

S&P 500’s Rally May Last as Strategists Turn Sour

April 03, 2012

Traders at the New York Stock Exchange on April 2, 2012. Photographer: Richard Drew/AP Photo

Traders at the New York Stock Exchange on April 2, 2012. Photographer: Richard Drew/AP Photo

Wall Street strategists cut their recommended holdings in U.S. equities to almost the lowest level since 1998, a sign that the six-month stock rally may have more room to go, according to Bank of America Corp.

Strategists advised investors to reduce equity allocations in six out of the past eight months, with money earmarked to stocks falling to 55.8 percent in March. The level was the lowest since January 1998, except for the seven months ended July 2009, and compared with a 15-year average of 60.7 percent, according to data compiled by Bloomberg and Bank of America.

Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, said the decline in recommended stock holdings signaled rising pessimism that she considers as a contrarian indicator because investors who have sold shares now have more money to purchase stocks.

“We take some comfort in Wall Street’s lack of optimism,” Subramanian wrote in a note yesterday. “It has historically been a bullish signal when Wall Street was extremely bearish.”

Wall Street strategists turned sour on stocks as the Standard & Poor’s 500 Index (SPX) surged 29 percent through yesterday from its 2011 low in October. Shares rallied as economic data beat economists’ forecasts and Federal Reserve Chairman Ben S. Bernanke said he will keep interest rates low through at least late 2014 to spur growth.

Subramanian said a balanced portfolio would allocate 60 percent to 65 percent of its money to stocks, as suggested by benchmark indexes. The recommended stock holdings had stayed below 65 percent since at least 1985 until 2000, data from Bank of America show. The S&P 500 surged almost 15-fold during the 20 years through 1999 before peaking in 2000.

Strategists’ bullishness exceeded 65 percent again in 2007. That year, the S&P 500 reached its all-time high of 1,565.15 on Oct. 9. The reading fell to 51.6 percent in March 2009, the lowest level since 1997. The S&P 500 reached a 12-year low that month and has since rallied 110 percent to 1,419.04 yesterday.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

Traders at the New York Stock Exchange on April 2, 2012. Photographer: Richard Drew/AP Photo April 3 (Bloomberg) -- James Paulsen, chief investment strategist for Wells Capital Management, discusses investment strategy and the outlook for the stock market. He speaks with Betty Liu, Domimic Chu and Josh Lipton on Bloomberg Television's "In the Loop." (Source: Bloomberg) April 3 (Bloomberg) -- Abby Joseph Cohen, a partner and strategist at Goldman Sachs Group Inc., talks about the outlook for U.S. stocks and the global economy. She speaks with Sara Eisen on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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