With S&P 500 up 37 percent in a wink, analysts turn bearish

Are you a bull or a bear? If you're someone who values analysts' sentiment, you're probably turning bearish, or at least looking at the market with increasing skepticism.

That's because the rally that has driven the S&P 500 up 37 percent since hitting a 12-year low near 660 in March has raised analysts' concerns about the pace of the stock rebound, Bloomberg News reported Monday.

The S&P 500's biggest rally since 2002 has resulted in 34 percent of the index's companies exceeding analysts' price targets for next year, Bloomberg News reported -- historically a sign that the market may be getting a bit ahead of itself.

Did the market rise too fast?

"The equity market has priced this recovery and then some," Barry Knapp, U.S. equity strategist at Barclays Plc (BCS) in New York, told Bloomberg News Monday. "It looks pretty expensive to us."

Analysts' sentiment is one thing, but P/E valuations use profits and historical patterns as the basis for concluding whether the market is overpriced or underpriced. And by one key metric, future earnings, the S&P's current level is not unreasonable. Yale University Economics Professor Robert Shiller's 128-year data set shows an S&P 500 average of 16.3 times forecast earnings, and the S&P 500 is currently trading at about 16.25 times forecast earnings.

Technical indicators: Bullish

You've heard the sentiment and the valuation arguments. What do the technicals say? In general, the S&P 500's chart is healthy, though it still is slightly overbought, short-term. It's above the 50-day moving average, but the 200-day moving average -- the toughest average to break in trading -- remains at 952.

Market Analysis: Investors should keep in mind two other factors when assessing whether now is the time to increase or establish a position in stock-based mutual fund, sector, or company: 1) the size of the S&P 500's recent move and 2) the S&P's valuation band. The first points to a correction by the S&P of at least 10 percent and perhaps as large as 30 percent; that would take the S&P down to 821 or 639, respectively. Second, the S&P, like the Dow, frequently trades at a premium (or a discount) to the forecast P/E average, depending on economic sentiment. Currently, that sentiment sees the U.S. recession bottoming in the second half, something that tends to produce a premium. Hence, the two factors create a cross-pressure.

Bottom Line: What's the outlook for the S&P 500 then? The view from here argues that a correction of up to 10 to 15 percent is ahead, followed by a resumption of the bull market, which would make the pull-back a buying opportunity.

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