Wall Street traders see room for pause in market climb

NEW YORK (AP) — Goldman Sachs & Co. reminded investors that the stock market can still go down.

The government charged the bank with civil fraud Friday and the Dow Jones industrial average fell 126 points, its biggest slide in more than two and a half months. The Goldman Sachs news gave a dose of reality to investors who were used to seeing the market climb almost relentlessly on signs of a recovering economy.

But there are signs investors are already shaking off the Securities and Exchange Commission’s charges that Goldman Sachs failed to tell clients about conflicts of interest in mortgage investments it sold. Stocks ended off their lows Friday. That’s a sign that investors are still making predictions that stocks will bounce higher.

“They’ve been conditioned to buy the dips and they’ve been rewarded. It’s like a Pavlovian thing,” said Alec Young, equity strategist at Standard & Poor’s. “The road is littered with the bodies of people that have predicted a pullback in the last couple of months.”

It’s easy to see from recent news why stocks are trekking steadily higher. Big companies like chipmaker Intel Corp. and financial firm JPMorgan Chase & Co. last week posted huge profit gains for the first three months of the year. The government reported that employers added jobs in March at the fastest rate in three years. Sales at chain retailers posted the biggest gain last month in more than 10 years.

The problem is that stocks haven’t had a break, and that makes the market more vulnerable to a big drop. The Standard & Poor’s 500 index has risen 76 percent since it hit a 12-year low in March last year. There have been five periods since then when it lost five percent to eight percent. But those drops still don’t count as a full correction, which most analysts say is 10 percent.

Standard & Poor’s Equity Research predicts that the S&P 500 index will reach 1,270 in the next 12 months but that a drop of five percent to 15 percent along the way is possible. The S&P 500 topped 1,200 last week for the first time since before the worst days of the financial crisis in late 2008. To get to 1,270, the index would need to go up 6.5 percent.