Well-known stock bear shifts, tells clients to boost holdings

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Precious few investment research firms seriously warned clients away from stocks before this year’s market meltdown. One firm that did now says it’s time to wade back in.

Ned Davis Research in Venice, Fla., today raised its stock weighting to 55% of its benchmark diversified portfolio, from 40%. The firm cut its recommended allocation of bonds to 35% from 40%, and its cash recommendation to 10% from 20%.

Ned Davis is well-known as a supplier of research to big investors, and is famous for its historical database on market trends. The firm began to turn cautious on stocks in July 2007 -- a few weeks before the credit crisis began to explode. The firm’s recommended stock weighting was trimmed from 55% to 50% on July 30, 2007.

On Jan. 18 of this year the weighting was slashed to 40%, when the Standard & Poor’s 500 index closed at 1,325.19.

Shifting a chunk of money out of stocks at that point would have saved investors a hefty sum: The S&P, at 888.67 today, is 33% below its level on Jan. 18.

Ned Davis isn’t calling this a new bull market. But Tim Hayes, the firm’s chief investment strategist, said in a note to clients that the market is ‘following the script for a bottoming process.’

The shift back to a 55% stock weighting was triggered by a number of positive technical market signs, Hayes said. One of those signs: Sell-offs since Oct. 10 have occurred on diminishing share volume, ‘suggesting that selling pressure has been letting up.’

Also, high levels of cash held by hedge funds and other big investors mean ‘the market may rise quickly as the upside momentum takes hold,’ Hayes said. ‘And that could happen soon if the market follows seasonal tendencies.’

December and January historically have been winning months for stocks (although November usually is a good month, too -- but not this year).

Finally, Hayes says, record low yields on Treasury securities, and expectations for a huge federal spending program to boost the economy in 2009, raise the odds that stocks will outperform bonds.

Laszlo Birinyi, head of Birinyi Associates Inc. in Westport, Conn., is another bear who recently shifted to the sunnier side. This Bloomberg story explains his reasoning.

-- Tom Petruno