U.S. Stocks Retreat From Four Month High on Valuations

By Lynn Thomasson

May 11 (Bloomberg) — U.S. stocks retreated from a four- month high after the Standard & Poor’s 500 Index traded at the most expensive level in seven months relative to earnings and lower energy prices weighed on commodity producers. European shares and oil fell, while Treasuries and the dollar advanced.

Capital One Financial Corp., U.S. Bancorp and BB&T Corp. tumbled at least 5 percent on plans to sell shares to repay government bailout funds. Bank of America Corp. and Wells Fargo & Co. slid more than 2.5 percent after a measure of financial stocks surged 23 percent last week. Alcoa Inc., the largest U.S. aluminum producer, and Exxon Mobil Corp. slumped as energy and metals prices fell.

The S&P 500 lost 1.7 percent to 913.38 at 9:36 a.m. in New York. The Dow Jones Industrial Average declined 99.25 points, or 1.2 percent, to 8,475.4. Europe’s Dow Jones Stoxx 600 Index slid 1.6 percent. Crude fell from a six-month high, dropping 2 percent to $57.45 a barrel in New York.

“The market has gone too far, too fast,” Douglas Cliggott, the Greenwich, Connecticut-based manager of the $81 million Dover Long/Short Sector Fund, which beat 97 percent of its peers last year, told Bloomberg Radio. “There is a risk that the market will give quite a bit of the move back.”

The S&P 500 last week rose 5.9 percent, erasing this year’s losses, after results from the government’s examination of banks reassured investors and the Labor Department said the pace of job cuts slowed in April. The measure’s 37 percent jump since March 9 is the most over similar spans since the 1930s.

The S&P 500 ended last week trading at 15.1 times its members’ reported earnings, according to Bloomberg data, the highest since October.

Pace of Recovery

The biggest earnings-season rally since 2002 has pushed 34 percent of the companies in the S&P 500 above analysts’ price targets for the next year, raising concerns about the pace of the recovery. The benchmark index for U.S. equities is within 5 percent of the combined price projections of more than 1,700 securities analysts after gaining 14 percent since Alcoa reported first-quarter results on April 7.

Earnings for S&P 500 companies will slide 35 percent this quarter and 23 percent in the July to September period, according to analyst estimates compiled by Bloomberg.

Options traders are increasing bets that the rally is about to end. Futures on the Chicago Board Options Exchange Volatility Index, which measures the cost of buying or selling options as insurance against declines in the S&P 500, are priced above the gauge’s level of 32.05. The premium on VIX contracts expiring this month through November indicates traders are betting the stock index will fall in the next six months.

To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

Last Updated: May 11, 2009 09:37 EDT

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