Raymond James S&P 500 Call Upended by Sixth V-Shaped Rebound

Aug 22, 2014 4:09 pm ET

(Updates today’s trading in seventh paragraph.)

Aug. 22 (Bloomberg) -- In early July, Jeffrey Saut, the chief investment strategist at Raymond James & Associates Inc., saw a violent pullback coming for the U.S. stock market. He was only half right.

The Standard & Poor’s 500 Index rallied to an all-time high yesterday, completing a rebound from an almost 4 percent retreat that began July 24 and dashing Saut’s prediction for a 10 to 12 percent drop. While he still says the odds favor a prolonged slump in equities coming this year, the recent rally has pushed the U.S. equity benchmark within 8 points of 2,000.

“The geopolitical events didn’t disrupt the equity market as much as I thought they should have,” Saut said a phone interview yesterday. “In this business, it’s like in sailing. You can’t change the direction of the wind, but you can adjust the sail on the sailboat.”

Investors are quick to both sell and buy in a market that has gone almost three years without a retreat of 10 percent as the strengthening U.S. economy puts a floor under declines spurred by crises from Argentina to Ukraine. Almost $900 billion has been restored to American equity values since early August and the S&P 500 is heading for a third straight weekly advance.

The stock-market rebound was the sixth in two years where equities needed less than two weeks to recover after a drop of 2 percent or more, according to data compiled by Sundial Capital Research Inc. The V-shaped pattern of losses followed by gains is recurring more often than at any time in almost eight decades, the data show.

Beach Ball

“It’s like trying to push a beach ball underwater and having it pop right back up,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. “That’s what’s been happening to equity markets as the Federal Reserve has been accommodative.”

The S&P 500 added 0.3 percent to 1,992.37 yesterday as data showed fewer Americans than economists forecast applied for unemployment benefits last week and purchases of previously owned U.S. homes unexpectedly rose in July. The gauge slipped 0.2 percent at 4 p.m. today in New York as tensions reignited over Ukraine while investors scrutinized comments on monetary policy by Federal Reserve Chair Janet Yellen.

Persistent gains and shorter losing streaks are encouraging investors to buy dips. The S&P 500 has posted no declines that lasted more than three consecutive days in 2014, compared with an average of nine a year since March 2009, according to data compiled by Bloomberg. While it suffered three retreats this year that exceeded 3 percent, in each case, the losses were recovered within a month.

Feel Stupid

Stocks started tumbling in late July as Argentina defaulted on debt, U.S. President Barack Obama announced new sanctions against Russia and a better-than-expected reading on second- quarter U.S. gross domestic product spurred concern that the Fed may lift interest rates sooner than anticipated. The S&P 500 reached a two-month low Aug. 7 and has since risen on all but two days.

“There is a great hesitation to buy at new highs and then feel stupid when the inevitable correction hits,” Jason Goepfert, president of Sundial in Blaine, Minnesota, wrote in an e-mail. “So once we’ve seen a bit of a dip, we can rationalize to ourselves that, ‘Well, at least I didn’t buy at the high, even if we do decline further.’ That feeds on itself and pretty soon we’re right back at new highs again.”

Goepfert found that the only time when V-shaped rebounds happened more often than now was during the two years through December 1936. At that time, seven occurred.

V-Shaped Pattern

Goepfert defines the move as a drop of at least 2 percent over five to 10 days and a subsequent gain of a similar magnitude over a comparable period. During the process, prices have to reach at least a one-month low and not fall back within 0.5 percent of the bottom on a closing basis.

The U.S. stock market experienced similar patterns in the first two months of 2014. The S&P 500 sank 2.1 percent Jan. 24 and 2.3 percent Feb. 3 before bottoming. Over the next six days, the index pared most of the losses, jumping 4.5 percent.

Saut at Raymond James isn’t the only one whose bearish views were overturned by the stock market’s resilience. On Aug. 18, Barry B. Bannister, an equity strategy at Stifel Nicolaus & Co., increased his year-end forecast for the S&P 500 to 2,300, implying a 15 percent rally from current levels. He was previously tied for most pessimistic with an estimate of 1,850.

“It’s unknowable,” said Saut, who is based in St. Petersburg, Florida. “You’re due for something like 10 to 12 percent pullback sometime this year, but I’ve never wavered that we’re in a secular bull market that’s very likely to have 10 years left to run and it’s going to double from here.”

--With assistance from Callie Bost and Joseph Ciolli in New York.