'Overbought' S&P 500 will plunge 7% by end of Feb: BGC

The Standard & Poor's 500 Index may decline more than 7% by the end of next month because a “near breathless rally” has left the gauge “overbought” and pushed bullishness to a record, according to BGC Financial LP. “Downside market risk has been mounting and hedging long exposure is extremely relevant,” Michael Purves, chief market strategist at BGC, wrote in a note to clients dated Jan. 14. He predicted the benchmark measure for U.S. stocks may retreat “to 1,200 and potentially lower” by the end of February, accompanied by a “meaningful spike in volatility.” The S&P 500 rose 1.7% to 1,293.24 last week for the longest stretch of weekly gains since May 2007. The increase pushed the measure's 14-day relative strength index, which tracks momentum by comparing closing prices with daily trading ranges, to 76.72, according to data compiled by Bloomberg. Technical analysts say an RSI above 70 indicates an index is “overbought” and likely to fall. Last week's survey of stock-market sentiment from the American Association of Individual Investors showed 52% of respondents were bullish and 23% bearish. That's approaching positive sentiment levels not seen since 2007, according to Purves. Technical analysts, who try to predict stock moves based on price and trading patterns, track investor sentiment as a contrarian indicator. They interpret greater optimism as bearish and increased pessimism as bullish. The S&P 500 has climbed 23 percent from its August low as the Federal Reserve unveiled an additional $600 billion of bond purchases to assist the economic recovery. Futures on the S&P 500 expiring in March fell 0.3 percent to 1,285.7 at 7:12 a.m. in New York. U.S. stock markets are closed today for the Martin Luther King Jr. holiday. “A rally fueled by the experimental drug known as quantitative easing carries it with a higher downside risk than rallies emerging out of classic economic cycles,” Purves said. --Bloomberg News--