Hays Says S&P 500 May Climb 28% This Year: Technical Analysis

(Bloomberg) -- The Standard & Poor’s 500 Index may climb another 28 percent within six months as the “smart money” piles back into equities, building on the steepest rally since the 1930s, said Don Hays, founder of Hays Advisory Group. Trading in options on the S&P 100 Index and buying and selling by company insiders show that the most-informed investors turned more bullish in the past month, according to Hays, who began using sentiment indicators to predict the market’s direction in 1969.
“I’m very encouraged and believe we may see a breakout in the next two weeks on the upside,” Hays said in an interview. The S&P 500, which closed trading at 940.74 yesterday, will probably surpass 1,200 within six months, he said.The S&P 500 surged 40 percent between March 9 and June 12, the most since the Great Depression, on optimism the deepest recession in a half century may be ending. It fell 38 percent last year after Bear Stearns Cos. sold itself to JPMorgan Chase & Co., Lehman Brothers Holdings Inc. filed a record bankruptcy and the government took over American International Group Inc.

The S&P 500 climbing above 950 on heavy volume would suggest that the bear market ended when the index hit a 12-year low on March 9, Hays said.The 950 level is important because it is the approximate top end of a chart pattern that the S&P 500 began to form in October, Hays said. Hays, a technical analyst, makes predictions based on price and volume data.

Head, Shoulders
The inverse head-and-shoulders pattern consists of a decline to 741.02 on Nov. 21, followed by a rebound to 943.85 on Jan. 6 to form the left shoulder. A subsequent drop to an intraday low of 666.79 on March 6 followed by a rebound to 956.23 on June 11 formed the pattern’s head. The index then declined to 869.32 on July 8 to form the right shoulder. While it’s smaller than the left, recent trends in trading volume and the number of stocks falling to 52-week lows are also typical of a pattern that’s marked the end of other bear markets, Hays said.

The highest-volume days on the New York Stock Exchange in the past year were Sept. 19 and Oct. 10, as stocks made their first steep drop, and March 20, as they rebounded from the pattern’s lowest point. The number of stocks making new lows peaked Oct. 10, and also jumped on Nov. 20 and March 6, according to data compiled by Bloomberg.“It’s a very common thing at the end of bear markets that you’ll have a reverse head-and-shoulders pattern that calls the bottom,” Hays said.His expectation that the index will surpass 1,200 is based on the magnitude of the rebound from the March 6 intraday low to the 950 level, an increase of 284 points. Historically, that distance is “a very good predictor of the magnitude of the rally once it breaks out of the shoulder level,” he said.