Why you should still be bullish on stocks | Trading Desk | Investing ...

While many who avoided panic selling during the financial crisis already saw new portfolio highs last year, some on the sidelines are now waiting for a more attractive entry point to jump back in.

The S&P 500 hit a new all time high last week, more than doubling since bottoming in March 2009.

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But waiting for a pullback ? the index slipped seven points on Monday to 1,562.2 ? and trying to time the market have proven a difficult strategy, leading more often to underinvestment and underperformance in up-markets.

?With widespread expectations for a pullback, and many looking to buy on the dip, any near-term pullback we get could be shallow and short-lived,? Savita Subramanian, an equity strategist with Bank of America Merrill Lynch, told clients.

She said that corrections of 5% or more typically happen about five times a year, with the last one occurring in November 2012.

Any near-term pullback we get could be shallow and short lived

?Fundamentals and valuations remain attractive, and investors continue to be skeptical of the strength and sustainability of this bull market. That is all very bullish for equities, and as the year progresses we expect further evidence that the global recovery remains intact,? she added.

The strategist also pointed out that while the S&P 500 is essentially flat over both the past five and 13 years, the underlying fundamentals have improved.

For example, the index?s leverage ratio has been cut in half since the last peak in 2007. Meanwhile, profits are 13% higher and its dividend yield is 30 basis points higher.

On valuation, Ms. Subramanian estimates the S&P 500 is 10% cheaper in real terms and on a price-to-earnings basis compared to 2007, 17% cheaper on EV/EBITDA and 25% lower on price-to-book value.

?Based on these improvements, we find it somewhat surprising that it has taken this long to make new highs,? she said.

Deutsche Bank equity strategist David Bianco also looked at dips of 5% or more, noting that while they are inevitable, they don?t happen in the absence of bad news or emerging risk.

He pointed out that it?s been 90 trading days since the last 5%+ decline in the S&P 500 and 374 days since a correction. Since 1960, the average number of trading days between 5%+ dips is 118 and 357 for 10%+ corrections.

Of course, pullbacks aren?t clockwork.

?They come on disappointment, which raises uncertainty that requires reassessment at the time,? Mr. Bianco said in a research note.

The strategist is telling clients to resist the urge to sell in anticipation of the S&P 500 hitting new highs this spring. He pointed to the Fed reiterating its commitment to asset purchases until the job market improves considerably, Congress passing a budget resolution that reduces shutdown risk, and an expectation of good first quarter earnings reports.

It also helps that April is the second strongest month of the year, on average, after December. While the index has fallen more than 5% nine times since 1957 in the month, Mr. Bianco noted that most of these declines occurred due to concerns of Fed tightening or high P/E.

?Perhaps it will be time to tactically sell in May, but it looks best to stick around for April,? he said.

As U.S. stocks make new highs and leave other global markets in the dust, the MSCI World Index is still roughly 15% off its peak and the ex-U.S. segment is 25% below it high of five years ago.

?The U.S. is seemingly impervious to all that goes around it,? said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.

However, he warned that some signals that stocks are overbought are beginning to take hold. These include the Street?s 2013 targets for the S&P 500 now being raised north of 1,600, 11 straight weeks of positive flows into stock funds, and sentiment polls showing the lowest percentage of bears since May 2011.

?As was the case at the 2001 highs and the 2007 highs, so many folks seem to assess how good things are based on what the stock market is doing. That is not always a good thing to do,? Mr. Rosenberg said.

?Those jumping in now after a five year period in which the major averages have soared 135% and without the major components of the economy having fully recovered could end up being a classic case of bad timing? as if we haven?t seen this before.?

Source: http://business.financialpost.com/2013/04/01/why-you-should-still-be-bullish-on-stocks/

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