Morgan Stanley Sees S&P 500 Falling Back to December Lows

(Bloomberg) -- Investors chasing the U.S. equity rally should pull back as the S&P 500 Index bumps up against key technical levels on charts and the earnings season will probably bring more bad news, warned Mike Wilson, Morgan Stanley’s chief U.S. equity strategist.

That double hurdle is likely to send the S&P 500 back to its December lows at around 2,350, Wilson said in a research note Monday. It faces challenges around the range of 2,600 to 2,650, “which is a good level to start lightening up,” he said. The benchmark gauge came within five points of 2,600 for a third day in a row through Friday.

Morgan Stanley Sees S&P 500 Falling Back to December Lows

“The issues we still need to deal with include the fact that we are in the midst of a fairly steep and broad negative earnings revision cycle, and there is significant technical resistance/overhead not far above current prices,” Wilson wrote in a note to clients. “We expect upcoming negative data will prove 2,600-2,650 to be a good sale before a proper retest of the December lows.”

Stocks fell Monday as China trade data showed a worse-than-expected slump and Citigroup Inc. kicked off the fourth-quarter reporting season with lackluster results. While Wilson has predicted a 50 percent probability of S&P 500 earnings suffering two quarters of declines this year, he said the fourth-quarter rout that sent stocks to the brink of a bear market largely reflected the expected recession.

Once the market revisits its December lows on less momentum and better breadth, investors should consider buying cyclical stocks that were hit the hardest during the recent slump, such as energy shares, according to Wilson.

“We are likely to experience a rolling bottom as a prelude to the next bull market on a FIFO (first-in, first-out) basis. That means early cycle stocks and regions that tend to do well once a recession is priced,” he wrote. “Wait for the retest and look to buy the cyclicals.”

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