"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

27 November 2006

Merrill Lynch Calls Market Top

This Party May End Before It Starts
By CONRAD DE AENLLE, The New York Times
Published: November 19, 2006

THE stock market has had a great run over the last few months, but as the holiday season begins, some analysts are worrying that the traditional year-end rally on Wall Street may have already come and nearly gone.
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Mary Ann Bartels, technical research analyst at Merrill Lynch, wondered in a note to investors whether the tendency for stocks to climb in the last couple of months of the year had been rescheduled this year for September and October.

“We think yes,” she wrote. She then acknowleged feeling torn between what her charts have told her and what the calendar and history have led her to expect.

“It is not our favored stance to be more toward the bear camp looking for a cyclical correction of 8 to 10 percent, but all of the market indicators suggest this is the more likely scenario over the coming weeks,” Ms. Bartels said. “What is surprising is that these readings are occurring at this time of year. Most years see a bullish year-end rally.”

She highlighted several exceptions that prove the rule, including three years in the 1990s when the Standard & Poor’s 500-stock index lost at least 6 percent at some point during the last two months of the year. What signs suggest that 2006 will play out as those three years — 1991, 1994 and 1996 — did?

Trading volume has shrunk, something that often precedes a price decline, she noted, and several sentiment indicators, including opinion surveys of investment advisers and measures of market volatility, show the sort of complacency that typically occurs near market tops.

She also detected a “barbell strategy” among investors, favoring emerging markets on one end and defensive, high-quality American blue chips on the other while ignoring the moderately risky stuff in between. That is similar to the pattern last spring, just before the market took a tumble.

These warning flags lead Ms. Bartels to forecast a decline in the S.& P. 500 to as low as 1,260 from its close on Friday of 1,401.20 “All technical signs are pointing to the markets nearing a consolidation period and not a blowoff to the upside,” she said. “We cannot rule out further upside, but the risk/reward warrants a more defensive stance.”

DATA WATCH Few economic reports are on the business calendar, which is shortened this week by Thanksgiving on Thursday.

One report that may attract interest on Monday is the index of leading economic indicators for October. A Bloomberg News poll of economists forecasts an increase of 0.2 percent after a 0.1 percent climb for September.

On Wednesday, the University of Michigan will issue its revised consumer sentiment report for November. The Bloomberg poll forecasts a reading of 93.1, up from the provisional reading of 92.3.


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