February 24, 2009 / 2:51 PM / 11 years ago

UPDATE 3-JP Morgan: S&P 500 could rise 8 pct in short term

(Adds more comments from J.P. Morgan and Credit Suisse)

By Antonita Madonna Devotta

BANGALORE, Feb 24 (Reuters) - The S&P 500 index .SPX could rise as much as 8 percent in the near term, according to a JP Morgan Securities strategist who believes the recent sell off in the index owes more to a capitulation by investors than fears of nationalization of banks.

Strategist Thomas Lee set a “trading buy” rating and short-term target of 800 on the index, with a stop-loss at 725.

On Monday, the S&P 500 index ended at 743.33 points, its lowest close in 13 years, as concerns grew that the nationalization of banks is not the right approach to bring the battered U.S. economy back on track.

But strategist Lee said the KBW Bank index .BKX has been relatively flat, while the S&P 500 has declined 5 percent since the middle of last week. If nationalization fears were behind the sell-off, the KBW Bank index should be lower, he said.

Unlike equities, credit markets have not significantly declined after the U.S. stimulus package was unveiled. Lee views this divergence as a positive as credit markets have led almost every stock market rebound since 1900.

Prices of U.S. Treasury bonds, seen as a safe haven, have rallied on deepening concerns about the fragile banking system and global economy. Recently, they have also risen on speculation about the nationalization of banks.

In contrast, the Dow Jones Industrial Average .DJI, which on Monday started higher with speculation of a larger government stake in Citigroup (C.N), touched a 12-year low on fears that the bank stabilization plan would not be enough to keep the economy from sliding into a deeper crisis.

Stocks briefly came off lows after the White House reiterated that a privately held banking system regulated by the government was still the best way to operate.

Separately, Credit Suisse said on Tuesday stock prices will largely follow company results until the United States showed clear signs of a workable scheme for “bad” banks and insurances, and Japan was willing to pursue aggressive fiscal easing.

The brokerage cut its target on the S&P 500 index to 920 from 1050.

“We continue to prefer corporate bonds, convertibles and index linked to equities, but believe investors should be a small overweight of equities,” analyst Andrew Garthwaite wrote in a note to clients.

Stocks may have hit a bottom at current levels as the geo-political backdrop, corporate cost-cutting policy response and broader monetary and fiscal policy response are all better than historic norms, the analyst said.

Garthwaite, who believes credit offers “excellent” value,” echoed J.P. Morgan’s Lee’s views on the relation between credit and equity markets.

“When credit rallies, so normally do equities,” he said.

The S&P 500 index rose about 2 percent to 758.39 points Tuesday morning. (Editing by Amitha Rajan, Pratish Narayanan)

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