Midday Musings: The Dow Is Now Every Guru's Pal

In the midst of February's market malaise, Tobias Levkovich, U.S. equity strategist at Salomon Smith Barney, switched from a neutral stance to a "bullish posture," as reported here.

The call proved well-timed, because the Dow Jones Industrial Average was up 8.6% since Feb. 19 heading into today's session, although it was giving back a chunk of recent gains at midday. Meanwhile the S&P 500 was up 6.5%, and the Nasdaq Composite was higher by 6.2% since the call.

Today Levkovich upped the ante, raising his year-end target on the Dow to 11,400 from 10,800, although he left the S&P 500 target range unchanged at 1300 to 1350.

Given the "strong market action" in the past few trading days, many investors may worry that it's too late to buy industrial names, or at least decide to "wait for better entry points on any pullbacks," Levkovich wrote, noting that most CEOs remain cautious in their public comments. "However, we think that over the next few weeks, more companies will concede that things are in fact improving, and the pullbacks may not be that significant."

Given his expectation of "upside earning surprises" in the first quarter from many economically sensitive names, the strategist predicted that "another powerful rally could occur in April" as raised earning expectations mix with potential technical breakouts, "thereby bringing in momentum money."

Presuming momentum money hasn't already arrived, Levkovich therefore "does not consider the rally over, although we may need to consolidate some of the recent gains." He continues to favor industrial and financial stocks, consumer discretionary names and "old tech" such as IBM (IBM) and Intel (INTC), which was up 3.4% at midday following a Morgan Stanley upgrade.

Salomon has done underwriting for IBM.

Levkovich was unavailable for additional comment, but his optimism about the Dow is in stark contrast to the Nasdaq outperformance call made here last Wednesday.

I think Levkovich is one of the "good guys." But as Wall Street continues to pound the table on how investors should be buying the Old Economy cyclicals, consumer names, and so-called value stocks that have already had big runs, I'm expecting the Comp's relative strength to continue, as it was doing at midday today.

Indicator Revisited

Yesterday's Musing included a mention of Richard Bernstein's sell-side indicator, which apparently generated a lot of confusion, judging by the emails.

So let's try this again.

Introduced 17 years ago by Bernstein, chief U.S. strategist and chief quantitative strategist at Merrill Lynch, the sell-side indicator is based on the recommended asset allocations of major Wall Street strategists (including Bernstein) and is designed to be a contrary indicator.

"In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa," Bernstein wrote yesterday.

At 69.6%, the indicator's latest reading is the sixth highest in its history and therefore bearish. Each of the top five readings occurred within the last two years, which is evidence of the indicator's power as a contrarian signal, given the market's performance.

A more quantitative method -- a simple regression study -- showed that the sell-side indicator has predicted about 40% of the variability in the 12-month returns of the S&P 500 in its 17-year history, Bernstein reported. Over the same time period, short- and long-term interest rates and changes therein, the slope of the yield curve and changes in the yield curve "all produced inferior results," he wrote.

Currently, the sell-side indicator is "exceedingly bearish" and is forecasting a more than 20% decline for the S&P in the next 12 months. Bernstein believes gains of 5% to 6% are more likely, although that still makes him one of the least bullish strategists around.

Bernstein today made some changes to his recommended growth and value portfolios.

In the growth portfolio, he added Xilinx (XLNX) and Nvidia (NVDA), while deleting Guidant (GDT) and Stryker (SYK).

The remaining names in the growth portfolio, which is down 21% in the past 12 months, are Novellus (NVLS), AmerisourceBergen (ABC), Waiters Corp. (WAT), Fiserv (FISV), Micron Technology (MU), Harrah's Entertainment (HET), MBNA (KRB) and Pfizer (PFE).

In the value portfolio he added Providian (PVN) and Sara Lee (SLE), while dropping Lehman Brothers (LEH) and USA Education (SLM).

The remaining names in Bernstein's value portfolio, which is up 9.5% in the past 12 months, are FirstEnergy (FE), Pitney Bowes (PBI), Honeywell (HON), ITT Industries (ITT), Knight-Ridder (KRI), Equity Residential (EQR), FedEx (FDX) and Illinois Tool Works (ITW).

Merrill Lynch "may have" done underwriting for any of the aforementioned, according to the report's incredibly obtuse disclosure.

Neither Bernstein nor Merrill's press relations people were available for comment or clarification.

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