MNI ANALYSIS: US Stks Hold Near Record Highs, Not Backing Down

--Despite Mkt Jitters, Scope For Further Gains 

--TINA (There Is No Alternative) Still Driving

By Vicki Schmelzer

     NEW YORK (MNI)   - U.S. stocks were trading near record highs Tuesday and

showed no sign of backing down any time soon. 

     Despite market jitters about the need for a downward correction, analysts

offered up reasons for why the uptrend in equities might continue. 

     "We continue to hear increasing concern about investor complacency; yet on

our measures, both sentiment and positioning remain largely neutral. This is not

how bull markets end," said U.S. equity strategists at Morgan Stanley.

     Morgan Stanley's Equity Risk Indicator (ERI), which combines both sentiment

and positioning data," currently is only a bit above neutral, "which means we

are not in a concerning area," they said. 

     "This jibes well with our view that low equity volatility is not

necessarily a reflection of investor complacency, but is more a function of low

volatility in interest rates and currencies," the strategists said. 

     "This is supporting low economic and earnings data volatility, which

coincides with our call for higher equity multiples," they said.

     On the ERI components, positioning data is bearish, while sentiment is "in

the more bullish territory," they said.

     "This is starting to look similar to what occurred last fall going into the

U.S. Elections, and we think such a divergence is potentially a bullish signal

for near term equity prices," the strategists said.

     Morgan Stanley would rethink its view if "fund flows into equities pick up

meaningfully, hedge fund net exposure rises to the mid 50s (percent basis) and

sentiment polls make another leg higher, but we're not there yet," the

strategists said.

     BOA Merrill Lynch strategists voiced concern about valuation levels for

U.S. and global equities because "two of the three positives we had seen for

stocks have changed course."

     World central banks are either tightening or looking to normalize policy

while earnings growth appears to be decelerating, they said. 

     "One remaining positive is that bond yields do not present much competition

for stocks," they said. 

     "The other factor that has worked in favor of stocks has been popularized

as TINA - there is no alternative; That's still working for stocks, although

less so than before," the strategists said.

     And, some of the best equity returns come at the end of a bull cycle. 

     Their colleague, BOA Merrill Lynch U.S. strategist Savita Subramanian, has

noted that in the 12-month period before a market peak, the historic total

return has averaged 25%. 

     The S&P 500 has risen 16% in the past 12 months, which suggested that "some

of those gains may have already been realized," the strategists said. 

     For now, BOA Merrill Lynch has an "above-benchmark allocation" to U.S.

stocks "of 56% for the Moderate Profile" and a 6% allocation to cash. 

     The strategists warned however that come fall, U.S. budget and trade

negotiations or potentially new more restrictive trade measures, "could spark

market volatility and also a flight to quality, especially ironically Treasury

securities."

     In a recent research note, Goldman Sachs strategists observed "the mere

fact that bond and equity valuations are high does not mean they can't go

higher."

     But "with sentiment elevated, valuations at record levels, and labor

markets on track for levels that should soon begin to look overheated, this

expansion is clearly 'late-cycle', suggesting the wisdom of shifting to safety,"

they said.

     Timing is always the "tricky" part, given that equities historically "had

high returns two years before the onset of recession, making it costly to reduce

exposure too early," the strategists said. 

     "While it is late in the cycle, it is likely too soon to give much weight

to recession risk," they said. 

     "The low unemployment of the 1960s shows that it is possible for expansions

to continue well after unemployment has fallen below 4.5%; As such, it likely

makes sense to focus less on recession risk than on the evolving path of

monetary policy," the strategists said. 

     In light of Goldman Sachs view that "monetary policy will remain

accommodative for at least the next 6-12 months," the strategists continue to

advocate a 12-month overweight equity position, "but recognizing the unusually

low premia in global bonds, we remain underweight duration, neutral credit and

overweight cash," they said. 

     After ten straight days of record high intraday peaks and record high

closes, the Dow Jones Industrial Average posted a new record intraday high of

22,172.21 earlier, putting the index up 12.2% year-to-date at the time. 

     Earlier Tuesday also, the S&P 500 posted a new life-time high of 2,489.70. 

     On July 27, Nasdaq Composite posted new life-time intraday highs of

6,460.841 before succumbing to profit-taking in subsequent sessions and then

more recently moving higher.

     The DJIA, Nasdaq Composite and S&P 500 were last trading at 22,171, 6,419,

and 2,489. 

--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com

[TOPICS: M$U$$$,M$$FI$,M$$FX$]