What are the Charts Saying About the Markets?

I went to hear Mary Ann Bartels, chief technical analyst at Merrill Lynch yesterday.

Mary Ann been looking at charts for Merrill for a number of years now, following in the footsteps of such market analyst legends like Bob Farrell and Dick McCabe. While she's not always right on the markets (a point she is always quick to note in her presentations), I think she's had a pretty good track record, so she's certainly worth a listen.

Any good technical analyst - and I would include Mary Ann as part of this group - does not try to force their particular views on economic or company fundamentals to determine their opinions. Instead, by looking for trends in price patterns, they try to let the markets tell them what the future holds.

(By the way, I realize that many academicians scoff at technical analysis, claiming that it is no better than "voodoo". That said, most of the best portfolio managers I have met over the course of my career spend a good portion of their time looking at charts.)

Mary Ann's overall message was pretty bullish for 2011. She has a year-end target for the S&P 500 of around 1400 (which would be +7% from here). Her favorite sectors are energy (by far); consumer discretionary; and technology. She would avoid healthcare; financials; and the utilities sectors.

Interestingly, although she is bullish on stocks, she also believes that interest rates remain in a downward trend, so bonds remain a buy. Her work would suggest that U.S. Treasury 10-year notes have not yet reversed the secular downtrend began in the 1980's. While she would not be surprised to see the 10-year move to around 4% at some point (it is around 3.60% at this writing), she still thinks that we will once again test the lows in yields that we saw last year, which would imply 2.30% or so.

Mary Ann remains very bullish on commodities, especially copper. She thinks that gold remains in an uptrend, with a target of at least $2,000, although this is a longer term target.

One cautionary note: the transportation stocks have been weak recently, although the broader market averages have continued to move higher. This is a classic Dow Theory warning signal, and could project into some near-term market weakness. However, to Mary Ann, any pullback should be used to add to stock positions.

Warm thoughts on a cold winter's day.