Stocks could be in early bear market: Ned Davis

Published Tue, Aug 25 20152:55 PM EDTUpdated Wed, Aug 26 201511:38 AM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

In the midst of the Dow's largest three-day point decline in history, one market research firm moved assets to bonds from stocks. "Given the extent of indicator deterioration, last week's action has moved us closer to the latter conclusion (that the stock market is in the early stages of a bear market)," Ned Davis Research said in a note early Monday. "The equity downgrade is primarily a response to the mounting risk indicated by our Global Balanced Account Model," the note said. Tim Hayes, chief global investment strategist, said the revised allocations don't reflect as much caution as the model requires because he's still fairly positive on economic growth. "We had cut back our allocation … we didn't want to go overweight because of the exposure to risk," he said. The firm dropped exposure to U.S. stocks to marketweight, after previously boosting exposure to overweight in 2013. Source: FactSet "We are therefore returning to benchmark equity allocation in our recommended global and U.S. balanced account strategies, dropping stocks from 70 to 55 percent, raising bonds from 25 percent to 40 percent, and keeping cash at 5 percent," the note said. Global growth fears spurred by concerns about a China slowdown have weighed heavily on markets in the last few weeks. The selling intensified on Monday, with the S & P 500 joining the other major averages in correction territory and the Dow Jones industrial average posting its largest three-day point loss in history of 1,477.45 points. Hayes emphasized the asset shift was temporary and could revert once a bottom is established. He said sentiment got "far too pessimistic" and moves such as China's interest rate cut were a good sign. "I think it's sort of a mixed picture with this (economic) slowdown," he said. "That would be more consistent with this market correction resolved on the upside." Read More Did stocks bottom? Your 8-point checklist He's watching the market for at least two to four weeks as stocks test lows and build a base, before likely rallying into the year end. Correction: This story has been updated to reflect that Ned Davis was overweight U.S. stocks since 2013, not this April.

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Brendan McDermid | Reuters

In the midst of the Dow's largest three-day point decline in history, one market research firm moved assets to bonds from stocks.

"Given the extent of indicator deterioration, last week's action has moved us closer to the latter conclusion (that the stock market is in the early stages of a bear market)," Ned Davis Research said in a note early Monday.

"The equity downgrade is primarily a response to the mounting risk indicated by our Global Balanced Account Model," the note said.