Market due for a pause after rapid run, analysts say

Courtesy : Laura mondero - Market watch

Even some of the most optimistic stock pickers are saying the recent advance in stocks, which have rallied more than 50% off March lows, is looking a little long in the tooth.

Raymond James chief investment strategist Jeffrey Saut, offering a reminder that he forecast a market bottom back on March 2, said he wouldn't be surprised if stocks pulled back a bit before their next big advance.

But any pullback is likely to be short-lived, thanks to signs the U.S. economy is on the mend and plenty of investor money is still sitting in cash.

"I would be shocked if we retested the March lows," Saut said.

SPX 1,010, +13.40, +1.34%

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Since the S&P 500 (SPX 1,010, +13.40, +1.34%) hit an intraday low of 667 on March 6, that index of large-capitalization stocks has jumped 52%. In just under the past month, it's gained 15%.

Stocks rallied to new highs of the year Friday after the Labor Department said employers had cut 247,000 jobs in July, fewer than economists were expecting, adding to signs that the economy was starting to climb out of its recession. A return to profits at insurance juggernaut AIG also helped. See full story on jobs.

The S&P 500 gained 13 points, or 1.3%, to 1,010, led by more than 20% gains in CBS Corp. (CBS 10.81, +2.27, +26.58%) and American International Group (AIG 27.14, +4.61, +20.46%) shares, for its highest close since early October. See full story on AIG.

Gains since early March, supported at first by signs that the economy was turning and bolstered in recent weeks by better-than-forecast earnings results, are so steep that analysts say a pause or short-term dip is likely.

"I would say yes, we're overvalued, we've come too far too fast, we've overstated the strength of earnings," said Hugh Johnson, chief investment officer of Johnson Illington Advisors.

Still, he said he's not expecting anything more lasting than a short-term drop, if one happens at all.

"The market and economic indicators are signaling we are in the beginning stages of a bull market," he said.

Raymond James' Saut listed three reasons stocks could take a breather.

His analysis shows 90% of S&P 500 companies are above their 50- and 200-day moving averages.

He noted that "laggards" like General Electric (GE 14.70, +0.39, +2.73%) are starting to rally. The industrial conglomerate's stock has fallen 9% this year, as the ninth-worst-performing stock in the 30-member Dow Jones Industrial Average, but it's up 25% since July 1.

And he also reported that analysis of the correlation of presidential terms and stock performance points to a peak in late July or in August.

Sam Stovall, chief investment strategist at Standard & Poor's Equity Research, on Wednesday predicted that the S&P 500 would hit resistance when it tried to get beyond the 1,007-to-1,020 range.

"The S&P 500 is overbought from an intermediate-term standpoint," he wrote. "While we think the S&P 500 will take another stab to the upside, we think this will represent a topping phase."

Also on Friday, the Dow Jones Industrial Average (INDU 9,370, +113.81, +1.23%) rose 114 points, or 1.2%, to 9,370, its highest close since early November. The Nasdaq Composite (COMP 2,000, +27.09, +1.37%) ended up 27 points, or 1.4%, at 2,000. For the week, the S&P 500 gained 2.3%, the Dow-30 added 2.2% and the Nasdaq rose 1.1%.

Laura Mandaro is a reporter for Market Watch in San Francisco.