BofA: Stocks May Be Headed for a 20 Percent Drop
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The Fiscal Times
December 20, 2011

Another day, another stock market decline. And if that doesn’t depress you, just wait until you’ve heard the latest words of wisdom from the land of candlestick charts and dead cat bounces (also known as technical market analysis).

Mary Ann Bartels, head of technical analysis at Bank of America Merrill Lynch, warned investors in a report released Monday that the Standard & Poor’s 500-stock index fell below its 50-day moving average last week and is now about to start testing the lows last seen in October, around 1,074 to 1,100. Bertels gives even odds that those levels might not hold either, and that the S&P 500 might fall further, potentially dipping as low as 935 to 985. The index lost 1.2 percent on Monday to close at 1,205.35, but Bartels’ forecast lows would mean a drop of another 22.5 percent.

So much for any hope of a Santa Claus rally. But Bartels isn’t painting a portrait of unrelieved gloom. Market breadth – another measure of the overall market’s direction, which Bartels captures by using a 10-day moving average of the new 52-week highs minus the new 52-week lows on the New York Stock Exchange – is volatile but positive. And if investors can just hold on, she promises that “a new cyclical bull market” to take shape sometime next spring, during the second quarter of 2012.

Still, if you’re looking for alternatives to stocks, Bartels doesn’t offer much hope. Commodity price charts signal big drops ahead, she says, thanks in part to what she expects to be a period of significant underperformance by emerging markets. European large-cap stocks are laboring under a cloud (an Ichimoku cloud, to be precise, for those who monitor such technical concepts). Bond investors might be pleased if her predictions come true and prices edge higher, but those counting on fixed income investments to generate yields won’t be too thrilled. (The higher a bond’s price moves, the more its yield declines.)

Bartels did find at least one stock, in a surprising sector, that might be worth a look. Interestingly, on the day that her own employer, Bank of America (BAC), fell below $5 a share for the first time since March 2009 (it closed at $4.99), Bartels pointed to financial stocks as “the trouble spot for the market,” a sector for which bullish technical indicators remain elusive. Yet Bank of America’s own stock, she says, is approaching territory where it can be described as “near oversold.” Even there, “near” might be the key word.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.