Sentiment indicators have yet to show signs of extreme pessimism during the Standard & Poor’s 500 Index (SPX)’s retreat since April, suggesting there is still room for bears to push the market lower, according to UBS AG.
While the proportion of newsletter writers who said they are bearish on equities rose to a two-month high of 26.6 percent last week, it’s still below the peak of 46.3 percent reached in October, when the S&P 500 hit its 2011 low, according to data from Investors Intelligence compiled by Bloomberg. The New York Stock Exchange Short-Term Trading Index, a volume-based market breadth indicator, reached a 2012 peak of 2.52 last month, failing to break 3.0, a level that Michael Riesner and Marc Mueller of UBS consider a sign of capitulation.
“The missing panic sell-off and the low levels of bearishness are suggesting that we still have a high level of complacency in the market,” the Zurich-based analysts wrote in a note today. “With the current sentiment mix we can clearly say that the U.S. market is still far away from a contrarian bull call, which is one reason why it is likely to see more near term pain into June/July.”
A lack of pessimism is considered a contrarian indicator by some analysts who follow charts to make market predictions, because investors who haven’t sold stocks may have the power to drive the market lower.
The S&P 500 has dropped 6.5 percent since its April peak amid signs the world’s economy may be slowing and concern Europe’s debt crisis is worsening. The benchmark measure for U.S. equities last week rose the most since April after the cheapest valuation since November lured buyers. The index added 0.6 percent to 1,326.02 at 2:04 p.m. New York time today, after data showed stabilization in the U.S. housing market and Greek opinion polls eased concern the country will leave the euro.
About 38.3 percent of forecasters said they’re bullish on equities, down from 39.4 percent in the previous week, according to New Rochelle, New York-based Investors Intelligence.
“We are currently in a phase where definitely the bullishness has been deteriorating across the board,” Riesner and Mueller wrote. “On the other hand, the sentiment is yet not bearish enough to suggest that we are near an important market bottom.” The analysts said they expect the S&P 500 to fall toward 1,250 once the decline resumes.
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