(Bloomberg) -- The Standard & Poor’s 500 Index is unlikely to fall more than 4 percent from yesterday’s close after suffering its biggest drop in six weeks on Aug. 17, according to Vermilion Capital Management LLC.The benchmark index for U.S. stocks probably will remain above 950 points because it defied a chart pattern in May and June that signaled losses were imminent, according to said David Nicoski, Vermilion’s chief technical strategist. Technical analysts base their predictions on patterns in price charts.
From May 1 to July 10, the S&P 500 made a series of three peaks, with the highest occurring in the middle on June 12. The pattern is viewed as a signal that the market’s rally is about to reverse, and it didn’t, Nicoski said. The S&P 500 has climbed 13 percent since. “The failure of a bearish pattern is extremely bullish,” said Nicoski, who is based in Edina, Minnesota. “There’s a significant amount of support underneath this latest rally.”
The S&P Midcap 400 Index and the Russell 2000 Index have shown similar price trends, indicating any declines in those measures are likely to be limited as well, Nicoski said. The 950 level that Nicoski expects will provide support for the S&P 500 marks the high end of a second chart pattern that began in November. The index fell to the lowest of three troughs on March 9, rebounding to about 950 after each. It gained as much as 15 percent from a two-month low on July 10 and rose 1 percent to 989.67 yesterday.
Limited Gains
Most industries, including financial companies, have shown evidence of forming “bases” from which they can rally, Nicoski said. Insurers such as Hartford Financial Services Group Inc. and Lincoln National Corp. may help foretell the market’s direction because exposure to financial assets made them the last group to recover in previous bear markets, Nicoski said. While the charts suggest potential stock losses may be limited, gains may be as well during the “seasonally weak” months of September and October, Nicoski added. History shows that U.S. investors lose the most in September. The S&P 500 fell 1.3 percent on average since 1928 that month, data compiled by Bloomberg show.
Stocks May Fall 4-5%, Dow 8,800: Portfolio Manager
By: CNBC.com
Stock markets are due for a short-term correction of four or five percent, King Lip, portfolio manager at Baker Avenue Asset Management, said Wednesday. But he remains positive on the market for the long term."We remain very bullish on the market long term," Lip told CNBC. "In the short-term we actually think we're maybe due for a correction, somewhere in the neighborhood of maybe four or five percent. But we think it'll be a modest retrenchment and it actually will be a good opportunity for investors to buy stocks who have been on the sidelines."
He sees the Dow falling to 8,800-8,900 in the near term.
"The market has overshot just a little bit on the upside. The re-evaluation of the strength of the consumer will definitely come into play," he said. "And secondly, it's just about profit-taking. Investors have made a lot of money since the March lows and taking some profits off the table makes a lot of sense right now."
Lip acknowledged that short-selling in the market has dropped in recent weeks.
"Recent short interest actually has been falling. It rose the last two months, but within the last few weeks short interest has actually fallen," he told "Squawk Box Asia."Lip sees foreign and emerging markets outperforming the U.S. as he sees a slowdown in U.S. domestic growth hampering the economic recovery."We do think that foreign market and emerging markets will likely outperform the U.S. domestic market ... there's a lot of repairs that need to be in the U.S. economy which I believe will actually slowdown US domestic growth," he said.
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