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Sell Into This 'Bear Market Rally,' Morgan Stanley Says
NEW YORK (Dow Jones)--Investors should sell into the recent stock market rally, Morgan Stanley's strategist said Monday, arguing that it can't last as corporate earnings deteriorate further.
"We simply do not believe that the market has completely priced in the prospect of further earnings weakness or that it will, without interruption, look through this weakness to recovery," Morgan Stanley strategist Jason Todd wrote.
On March 18 the S&P 500 rallied 25% to above 800 points since its low of 666 on March 6 - a technical bull market - spurred by positive comments by bank chief executives about improving business conditions as well as a favorable market reaction to the government's efforts to support the financial system.
But the stock market started a second day of declines Monday, with the S&P 500 and the Dow Jones Industrial Average both falling more than 3% in morning trading, to 792 and 7547, respectively.
Todd said that when the S&P 500 is at 800 points and above, investors should sell into what he called a bear market rally. The rally is based on the growing belief that government actions have finally fixed the financial sector's worst problems, but Todd said that viewpoint overlooks a lack of support outside the financial sector, where earnings should worsen in coming quarters.
Stocks in several sectors appear overbought, he said, including in the information technology, industrials, materials, energy and consumer discretionary sectors.
Still, Todd said it's possible that 666 will mark the bottom in the S&P 500, even as the market retests its lows in the short term.
http://online.wsj.com/article/BT-CO-20090330-708898.html