S&P 500 Erases Half its Rally Since November in Bearish Signal

By Elizabeth Stanton and Jeff Kearns

Jan. 15 (Bloomberg) -- The Standard & Poor’s 500 Index wiped out more than half its gain since rallying from 11-year low in November, a sign the benchmark for U.S. equities may drop more.

The S&P 500 fell 3.4 percent to 842.62 yesterday, below the 843.57 midpoint of its 24 percent advance from Nov. 20 to Jan. 6. To technical analysts, who make predictions based on price and volume history, a so-called 50 percent retracement suggests selling momentum is increasing.

“Any time you break a level, it does open the risk for follow-through,” said Roger Volz, senior vice president at Hampton Securities Inc. in New York and a technical analyst since 1982. “At this point there is probably more risk, given the weakness in the financial sector.”

The next major retracement level is 61.8 percent, or about 822 on the S&P 500, according to Volz. Using intraday lows and highs rather than closing prices, the 50 percent decline would be reached at 842.43, just below yesterday’s close.

U.S. stocks fell yesterday after a government report showed retail sales decreased at more than twice the rate forecast by economists. Financial shares led the decline as Citigroup Inc. moved toward breaking itself up to restore profitability. The KBW Bank Index fell to its lowest close in 13 years.

“It’s important for it to hold right in this area and I’d hope it would, but who knows in this kind of environment,” said Ken Brusda, who manages $700 million at North Star Asset Management in Menasha, Wisconsin. “If it drops below this then from a technical standpoint I’m sure there would be sellers.”

The S&P 500 sank 38 percent last year, its steepest retreat since 1937, amid the worst financial crisis since the Great Depression and the first simultaneous recessions in the U.S., Japan and Europe since World War II.

December Rally

The benchmark index rebounded in December as President-elect Barack Obama proposed fiscal stimulus measures and the Federal Reserve cut its short-term interest rate to as low as zero percent.

On Sept. 17, the S&P 500 retraced half of its gain from the five-year bull market ended in October 2007. The index then tumbled another 35 percent to an 11-year low of 752.44 on Nov. 20 after the collapse of Lehman Brothers Holdings Inc. and the government takeover of American International Group Inc. pushed credit costs higher.

Financial stocks have plunged 63 percent in the last year, the worst performance among 10 industry groups in the S&P 500. None of the 81 companies in the S&P 500 Financials Index has advanced during that period.

To contact the reporters on this story: Elizabeth Stanton in New York at estanton@bloomberg.netJeff Kearns in New York at jkearns3@bloomberg.net.