Stock Technicians’ Verdict: The Market Rally Will Continue

Stock Technicians Verdict: The Market Rally Will Continue

Wall Street’s number crunchers are happy. Stock technicians, who use
mathematical formulas as well as charts and historical data to figure out
where share prices are headed, believe the market’s rally that started in
early March, and has pushed stocks up 36% in less than two months, is here
to stay. They say stocks will rise another 10%, before the market stalls.
That would leave the Dow Jones Industrial Average at around 9,200, or about
where it was in early October, just after the initial $700 billion bank
rescue plan was passed by Congress, though still well off the market high of
14,000 set two summers ago.

One of the key factors making technicians ebullient is that the
number of stocks going up recently far outnumbers the number of stocks
sinking. Last week, for instance, nearly 2,165 New York Stock Exchange
traded stocks rose, while only 1,009 fell. Market technicians say that is
good sign for shares because it means investors are optimistic about the
fortunes of a broad range of companies and not just one sector of the
market. Technicians also like the fact that historically most rallies last
much longer than two months, and that the market hit its low twice, before
rebounding. In the past, a so-called double bottom has been a predictor of
the end of bear markets.
In a recent report analyst Mary Ann Bartels of Bank of
America/Merrill Lynch told clients she thinks the current rally is being
driven by outright buying, and not just by short sellers closing out their
positions which involves a stock purchase. “The market rally can continue,”
she says.
Once considered black art, technical analysis is now widely
accepted on Wall Street as a method of predicting stock market moves. The
problem is most technical analysis relies on measures of momentum. When
stocks are going up, technicians tend to think that will continue, and visa
versa. And in reality, that is how the market works. Studies have shown that
stocks do tend to generally move in same direction for a while, before
swiftly shifting course. But technical analysis can lead to overly
optimistic views of the stocks at a time when they have been rising rapidly.
And that could be the case now. The recent rally has left the Standard &
Poor’s 500 with a price-to-earnings ratio, based on an estimate of 2009
profits, of 15, up from 11 at beginning of March. That means stocks are
relatively cheap compared to an average of the past two decades of about 20,
but nearly as much of a bargain as they were when the rally started.
Still, followers of technical analysis say there are a number of reasons to
be bullish now. First of all, while stocks are up, they are still much lower
than they have been recently. The percentage of stocks above their 200 day
moving average, which is a sign they they could be overvalued, is just 30%.
Back in 2007, when the market peaked, 80% of stocks were trading above that
What’s more, the current stock market rally is less than two months old. And
most rallies at the beginning of bull markets have lasted much longer before
stocks retreat. According to strategist Lazlo Birinyi, who has long used
technical factors to determine whether stocks are a good investment, in 23
of the past 24 bull markets stocks have risen for an average of 194 days
before falling more than 10%. That means the current rally, near 60 days,
has more than six months to go, on average, before stocks pull back.
“Absolutely, this is a bull market,” says Birinyi. “The market is telling us
that we got too negative.”See TIME’s pictures of the week.