A trader walks past the board on the floor of the New York Stock Exchange
After a four-week rally, stocks moved lower on Monday and Tuesday. Does this spell the end of the uptrend or just healthy consolidation? To find out, TIME contributing editor John Curran spoke with Mary Ann Bartels, stock market technical analyst at Bank of America/Merrill Lynch.
TIME: After a big rally, stocks are moving lower this week. Should we be concerned?
Bartels: We view this as a consolidation within a more bullish context. That is, we think we can still achieve recovery highs with this rally.
So this is healthy?
No, I wouldn't say healthy. What we said coming into 2009 is that stocks would enter a base-building phase that would, over time, heal the technical damage done to the market in 2008. What base-building means is that you go into a trading range. But we also could have some very exciting rallies in the process of base-building.
So does this rally have more to go?
This rally can hit 1055 on the S&P 500 and 9800 on the Dow, but longer term, we have to view this in the context of a base-building process, which means that we are probably going to go back down and retest the lows before this process is over. [The stock market's lows were 667 on the S&P 500 and 6440 on the Dow, both reached in early March.]
The S&P 500 index is lately yielding more than Treasuries, be it the T-bill, the five-year note or the 10 year. This is quite rare, but is it significant?
Whenever the dividend yield on the S&P 500 rises above 3%, which it has, that's significant, even if it's not above the 10-year Treasury. It says stocks are attractive. That said, we are very cautious about what to own in this market. Bottom line: If you can find high-quality companies — meaning they have a good balance sheet and provide yield — we think for the long-term investor this is now an attractive way to invest. The consumer-staples sector (i.e., food, beverage, tobacco, etc.) is a good sector for finding these types of stocks.
So base-building allows this rally to continue for a while, but you're also saying that it could take the Dow back below 7000? What determines our fate?
Whether we return to the lows will really depend on what happens to the financial-sector stocks. The government has provided many new programs to help fix our banking system, and how those programs work will determine whether the financial stocks have to go to new lows. The broader stock market has been building a technical base since October, but financial stocks are just starting to build a base. The risk we have is that financial stocks will have to go to new lows, and that will cause more volatility in the overall market.
Are there any parallels to this stock market?
We've likened this market to 1937 and 1938. In '37 you saw a 50% correction within the equity market. But in 1938, from March '38 to November '38, the market had a 60% rally. That was all part of a base-building process. The stock market really didn't make its low until 1942, and that was a marginal new low — all in the context of building a base. So what we're trying to tell investors is that the key to this market now is patience — that this is going to take time but that this trading-range process will, over time, heal the market. And eventually, at some point in time, we will launch into a new bull market.
O.K., back to the present: With stocks dropping this week, at what market level do you start to believe that we're going back to retest the lows of March?
If we go below 740 on the S&P and around 7030 on the Dow.
Good to know. Thanks.
Read TIME's Q&A with a Merrill Lynch strategist on the outlook for stocks.