S&P 500 Rally Poised to End, DeGraaf Says: Technical Analysis

(Bloomberg) -- The 34 percent rebound in the Standard & Poor’s 500 Index since March shows few hallmarks of a bull market, and stocks will probably stagnate for years, top- ranked analyst Jeffrey deGraaf said. The S&P 500 is at a level it first surpassed in 1997 even after the steepest quarterly advance in a decade, and is down 43 percent from its October 2007 record, according to data compiled by Bloomberg. The main benchmark for American equities probably will continue to make “no net price progress” for at least two more years, deGraaf said in an interview. The index rose to 905.84 yesterday.“The market in my best estimation is probably range-bound between roughly 1,000 on the upside and 700 on the downside, but I would put the risk to the downside,” he said. DeGraaf is a senior managing director at ISI Group Inc. in New York and was the top-ranked technical analyst in Institutional Investor magazine’s poll for the past four years. Technical analysts base predictions on price and volume charts.

Investors who took deGraaf’s advice when the advance began were rewarded. In a Bloomberg Television interview on March 13, he described the gain as the “best bear-market rally that we’ve seen during this bear market.” The S&P 500, which had advanced 11 percent from the March 9 low as of that date, climbed another 26 percent to a seven-month high of 946.21 on June 12.Since then, there’s been “a definite decrease or decay in the position of the bulls” as measured by volume and the numbers of advancing and declining shares, deGraaf said. Since May, volume on the New York Stock Exchange has averaged 1.24 million shares a day, compared with 1.63 billion a day during the previous 12 weeks.

‘Trading Ranges’
At the same time, drops in the prices of some commodities and strength in the Japanese yen relative to higher-yielding currencies such as the Australian dollar indicate that investor confidence in the global growth outlook is waning, deGraaf said.The aftermath of a credit crisis such as last year’s, in which banks globally lost $1.47 trillion as debt default rates climbed, creates conditions that “have a tendency to foster more trading ranges than they do trends,” deGraaf said. Declining worker productivity is one such obstacle, he said.The U.S. stock market may follow a path similar to Japan’s benchmark Nikkei 225 Stock Average from 1992 to 2000, he said. The average fell 40 percent during that span even as it posted five quarterly advances of at least 10 percent.

“Japan from 1992 to 2000 was in what aviators call a phugoid -- which is just this long oscillation in price,” deGraaf said. “It looks to us like there’s a reasonable probability that we’re going to enter into a similar period, with more government intervention and all these things that tend to come about after a bubble, particularly one that’s been driven by credit.”