Stocks Getting Ahead Of Themselves; Healthy Pullback Coming.

Thomas Lee of JP Morgan is skeptical that the exuberant rally is sustainable, purely on empirical technical data:

What happens after a 20%-plus rally (3/6 to 4/3)? Since 1900, a 7% pullback, implying an S&P 500 of 780 or so . . . . The question on our mind (and many investors’) is whether this rally is a Bear trap or the start of a Bull. For either camp (bull or bear), a market correction/ pullback would be helpful, allowing short sellers to cover and providing an entry point for real money buyers. But this market has been frustrating, as equities have shown an “underlying bid” and not provided the correction/pullback many are seeking.

We believe an 8%-10% pullback will be seen in coming weeks and supported by the historical pattern following a 20%-plus gain (in 40 days or less). Since 1900, the Dow (as a proxy for equities) has risen 20% or more within 2 months, 24 times. In the month following this gain, the Index has on average fallen 7% from a peak (see Figure 3). Using the S&P 500 recent closing high of 842 implies 783.

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