Tags: Darst | indicators | bear | market

Morgan Stanley's Darst: 3 Indicators Signal Bear Market

By    |   Wednesday, 08 October 2014 01:35 PM

The S&P 500 index fell Thursday, and is now down 2.1 percent from its Sept. 19 record high. So is there more to come?

David Darst, senior advisor at Morgan Stanley Wealth Management, looks at six measurements to determine whether a bear market, defined as a drop of at least 20 percent, is upon us. Three of those indicators point to yes, he tells CNBC.

But that doesn't have him convinced that we're in a bear market. Darst sees only a short correction before stocks resume their advance. "The market is basically taking a flu shot," he states.

The six signals for a bear market are:
  • Is the Federal Reserve tightening now? No.
  • Is a recession looming? No.
  • Are investors too euphoric? No, Darst says. The American Association of Individual Investors' latest weekly sentiment report showed optimism fell to its lowest level since early August.
  • Are long-term stock valuations stretched? Yes, but short-term valuations aren't.
  • Are bank stocks, small caps and transportation stocks under pressure? Yes.
  • Are bond yield spreads widening? Yes, "they are a bit," he notes.
The market "can still run further," Darst states. "This is a healthy period of pause, of retrenchment. We have not had those healthy periods."

In this environment, he recommends being defensive. "I think the small- and mid-cap stocks have really had a hard time. . . . I think you want to be tending toward international stocks that have gotten cheap now with the sell off."

Many investors are more worried than Darst is.

"People are really getting concerned about the global [economic] slowdown, and the fact that oil just continues to get sold, I think has initiated this selloff," Ian Winer, director of equities at Wedbush Securities, tells Bloomberg. "The Russell 2000 is underperforming again."

He was referring to the small-cap stock index, which has dropped 12 percent from its July 1 high. U.S. crude oil prices plunged to a two-year low Thursday.

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The S&P 500 index fell Thursday, and is now down 2.1 percent from its Sept. 19 record high. So is there more to come?
Darst, indicators, bear, market
Wednesday, 08 October 2014 01:35 PM
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