Bulls Won't Pull In Horns

As the rally off the mid-March lows progressed and accelerated, many traders watched for signs of capitulation by the bears, which occurred very grudgingly -- if at all. Some bulls took pleasure in the stubborn (and ongoing) skepticism of market watchers such as Merrill Lynch's Rich Bernstein, to cite one notable example.

But what of the other side of the spectrum? Notably, the optimism of most bullish strategists hasn't taken a respite, even as the rally started showing signs of fatigue in recent weeks, and again on Monday.

"The easy market call for us is to tuck away our tactically bullish horns following a near 30% run in the S&P 500 and more than 55% gain in the Nasdaq Composite off last year's October lows," observed Tobias Levkovich, senior institutional U.S. equity strategist at Citigroup Smith Barney. "The tougher call is to stick to our disciplines and [bullish] convictions."

On Monday, Levkovich reiterated his year-end target of 1075 for the S&P 500 and suggested that any "brief market correction" would set the stage for "yet another sharp trading rally" in which that target could be surpassed.

However, the strategist didn't seem overly concerned about the potential for even a short-term pullback of significance, suggesting "the current trading rally still has ample firepower," despite market action suggesting otherwise.

Levkovich's near-term optimism is based on a belief that for all the talk about rampant bullishness, investors remain gun-shy. "While we are aware of the bullish sentiment data, so is everyone else, and they seem ready to short stocks on that basis," he wrote, noting that noncommercial hedgers (i.e., speculators) remain net short S&P 500 futures while short interest in Big Board stocks has been rising this year. "Thus, arguing that everyone who was short stocks now has 'covered' seems foolhardy."

More fundamentally, Levkovich remains upbeat because of the "very aggressive" monetary policy (i.e., low rates) and "heavy dose" of fiscal stimulus (i.e., government spending and tax cuts). He believes the combination will help spur better economic growth and capital spending. Finally, he contends that equities remain attractive relative to corporate bonds and Treasuries, while conceding "the extreme nature of stocks being undervalued relative to bonds has eased somewhat."

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