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Under Pressure


Trend Condition Remains Bearish

--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
     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
     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:
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