Byron Says Higher Rates "Good" for Equities..LOL
US Strategy: Consolidation Continues - Byron Wien at MStanley
When investor sentiment on stocks became too exuberant a few weeks ago — with the Ned Davis Crowd Sentiment index at 75 at its peak — it was the perfect tip-off that the market had come too far, too fast. The 75 reading was the highest since the mid-1990s, and when you see that degree of bullishness, you know there will be trouble. The question now is whether the trouble is over. The Ned Davis poll has pulled back quite a bit to 54, but that only puts it neutral territory. My own view is that we are in a period of consolidation that could last into May, traditionally a month when the market makes a low point during a period of weakness. We could easily pierce the lower end of the recent trading range, although the argument against that is that a week ago we had a day of 11-to-1 down volume, which cleansed the market to some extent. More importantly, though, after a year without a 5% correction, the market probably has more work to do in consolidating or on the downside before it is ready to go back up.
Rick Bensignor points out that the low band of the recent trading range has been 1050-1080 on the S&P 500, with the upper band at 1160-1190 and a triple top at 1175. He thinks the index could get to 1250 this year, but he would be selling into that rally. If he is correct, that would make it impossible for the market to reach my 1300 target for 2004, but I remain optimistic primarily because I believe the economy will continue to improve, employment numbers will strengthen, and first quarter earnings will be very strong. As a result, I expect earnings estimates to be revised upward. Even though the consensus expects good earnings news, I think there is such a high degree of confusion about the economic outlook that the market will react positively when the earnings come through, as long as interest rates do not get too high. If the 10-year rate rose to 4-4 1/2% as a result of economic strength, I think that would actually be good for the market as it would portend a better economy ahead. But rates above 5% would be a negative. I continue to think the market will move higher in the second half and reach my 1300 target.
Market Data 
Markets 
