The rally that erased the Dow Jones Industrial Average’s 2010 loss yesterday and carried the Standard & Poor’s 500 Index above its 200-day average spurred optimism among chart analysts and investors who track earnings. The Dow advanced 1 percent to 10,525.43 yesterday to wipe out an annual slump that reached 7.1 percent on July 2 after U.S. companies beat analysts’ profit estimates at twice the rate they trailed them in the second quarter. The S&P 500 rose above its mean price in the past 200 days for the first time in more than a month, after surging 8.2 percent since June 30. Bullish signals are increasing in equities after the S&P 500 lost 13 percent in May and June, its biggest retreat since the bull market began in March 2009. Projections for the fastest S&P 500 income growth since 1988 are helping investors overcome concern that the economy will sink into its second recession in three years. “Everybody loves an up market and stocks are looking better from a technical perspective,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which has $2.7 billion in assets. “If technicals start to turn, then psychology can turn and investors can get interested.” As for earnings, “the numbers look good,” McCormick added. The S&P 500 rallied 1.1 percent to a one-month high of 1,115.01 yesterday, topping its 200-day mean of 1,113.71, after new U.S. home sales beat the median economist estimate and package-delivery company FedEx Corp. boosted its profit forecast because of greater demand for international express shipments. Indexes Fluctuate The U.S. benchmark fell 0.2 percent to 1,113.12 as of 11:54 a.m. in New York after climbing as much as 0.5 percent earlier, as a decline in consumer confidence to a five-month low overshadowed better-than-estimated earnings at companies from DuPont Co. to Lexmark International Inc. The Dow Jones Industrial Average climbed 1.5 points, or less than 0.1 percent, to 10,526.95, holding on to the fourth straight day of gains. Caterpillar Inc., General Electric Co. and American Express Co. surged more than 15 percent from July 2 through yesterday, leading gains in the Dow since it retreated to a nine-month low. Out of 30 companies in the measure, only one fell during that time: Johnson & Johnson. The S&P 500 failed to surpass the moving average on May 27 and June 3 after coming within 0.2 percent amid the biggest equity losses since the bull market began in March 2009. The index spent five days above the 200-day average in the middle of June before sinking. Moving Average “It’s always a good thing when you reclaim an important moving average because it gets rid of resistance,” said Christian Bendixen, director of technical research at New York- based Bay Crest Partners LLP. “I’ve been bullish for the last couple of weeks on a variety of signals that the sell side was exhausted.” Profits among S&P 500 companies will rise 35 percent in 2010, the fastest pace in 22 years, according to the average analyst estimate in a Bloomberg survey. “There were some worries about the strength of the economic recovery, but now we’re reaching that key level of the 200-day moving average,” said Giri Cherukuri, a money manager and head trader at Oakbrook Investments in Lisle, Illinois, which manages $2.2 billion. “People are looking to see if we can sustain it.” Slowing Expansion Bearish investors are counting on a slower economic expansion than the pace seen before New York-based Lehman Brothers Holdings Inc.’s 2008 collapse. Global growth may average 3.25 percent to 3.5 percent in the next three to five years, below the 4.7 percent pace of the five years leading up to the 2008 slump, estimates Stephen Roach, non-executive chairman of Morgan Stanley Asia. The S&P 500 has rallied this month as reports have signaled the economic rebound may continue. Since July 12, 83 percent of S&P 500 companies reporting quarterly results have topped estimates. The International Monetary Fund boosted its forecast for 2010 global growth to 4.6 percent from 4.2 percent on July 8 after a stronger-than-expected first half. That would be the largest gain since 2007. This month’s rally has trimmed the S&P 500’s second-quarter retreat of 12 percent through yesterday, which was the most in a year. The index is still down 8.4 percent from the 19-month high it reached on April 23. ‘Nasty’ Quarter “It’s reassuring that we could bounce back from that nasty second quarter,” said Ralph Shive, the South Bend, Indiana- based manager of the $1.5 billion Wasatch-1st Source Income Equity Fund. “It shows the correction was probably overdone, but we’re not back at the recovery high yet and we still need better news on the economy for people to get really comfortable about going back into equities.” There have been 10 times that the Dow has fallen more than 5 percent and gone on to post a gain for the year, according to data from Westport, Connecticut-based Birinyi Associates Inc. going back to 1962. The index averages a 7.7 percent rally from the date of the reversal through the end of the year, Birinyi data show. “Yesterday was big,” said John Lynch, chief equity strategist at the Wells Fargo Funds Management division of San Francisco-based Wells Fargo & Co. that oversees $465 billion. “The most recent pain is done. Yesterday really provides me with confidence.” To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.

Source