Ari Wald, Technical Analyst at Oppenheimer, gives three arguments against a major top in the S&P 500 and in favour of buying the pullback.
Wald says that the breakout by the Russell 2000 and by European equities decreases the risk of a correlated rollover. He points out that small-cap stocks suggests this is a healthy pause to refresh the rally and not a major top. See chart.
Two other pieces of data support the argument for a continuation of the bull cycle for the S&P 500: i) US credit spreads have narrowed since early February and held steady amid the latest market setback, and this, according to Wald, confirms the view of a healthy pullback rather than a warning of underlying stress, and ii) the put/call ratio is coming off its most pessimistic level of the year, which in Wald’s view is a contrarian buy signal.
Wald recommends going long cyclicals except those tied to commodity prices and his recommended overweights are Technology, Health Care and Consumer Discretionary. He is also bullish on Diversified Financials, which includes Institutional Brokers and Security Exchanges, and Transportation. His least favourite sectors are Materials, Utilities and Energy.