Bartels Notes Stock Market's Strength but Also a Bearish History Lesson

Mary Ann Bartels, head of U.S. technical analysis for Banc of America Securities-Merrill Lynch and one of the best stock market forecasters around, finds several encouraging signs in the market's recent run to new recovery highs. But she is also reiterating her warning that two historical patterns with strong track records could signal a correction fairly soon.

Bartels, in a note to Merrill clients, foresees continued strength for the very short term, perhaps to 1,200 to 1,230 on the Standard & Poor's 500-stock index. After that, she cautions, the tendency of stocks to decline in the summer and fall during years with mid-term congressional elections and years that end in "0" could assert itself. Here are some of her thoughts:

"The combined decennial 0 year and mid-term election year pattern calls for a down January, up February and an up March. So far, 2010 has fit that pattern in both direction and magnitude. Based on this pattern, the risk is [that the] S&P 500 can peak in the March to May period ahead of a correction into the fall. This implies that 2010 could be a 'sell in May and go away' year for equities."
Bartels also highlighted the recent drop in the number of bears in the Investors Intelligence survey of investment newsletter editors to fewer than 20 percent. As noted in past Against the Grain posts, this is a contrarian indicator that often foretells declining share prices.

Bartels' note offers encouragement to longer-term bulls as well. As long as the February low of about 1045 on the S&P 500 holds, the index could make it back to 1,325, she said.