By Mark Arbeter Just when it appeared the S&P 500 was going to fall off a cliff, buyers stepped in with reckless abandon late last week and rescued the index. On Thursday, the S&P was printing below July's intraday low of 775.96 and actually fell to 768.67, but a combination of short-covering and institutions seeing value in the market turned things around. The major indexes also saw strong gains on Friday, and the market was able to post a weekly gain for the first time since the week of Aug. 23.
While the market's action late this week was certainly encouraging, and may suggest that another counter-trend rally is at hand, it is way too early to believe that the worst of the bear market is over. Further strength over the next couple of weeks would be a big positive, especially if it was accompanied by high volume.
There were some indications that the market saw some panic selling this past week, and that usually occurs near intermediate-term bottoms. There are many forms of capitulation-type action, and it usually shows up in weak price action, and very high volume levels. However, that was not the case last week as the capitulation took place in internal statistics on the NYSE and with the Investor's Intelligence newsletter poll.
On Wednesday, there was certainly some panic selling among investors and that was seen in the NYSE breadth statistics. The declines/advances ratio was almost 6:1, the highest since Apr. 14, 2000. This kind of magnitude in weakness in the daily breadth statistics has frequently occurred near market bottoms, some major and some minor. Overall, it was certainly an indication that many stocks were being thrown in what appeared to be a "throw in towel" mentality.
Investor's Intelligence poll of newsletter writers showed a very large decline in bullish sentiment over the past week. Bullish writers declined to 31%, the lowest level since mid-October, 1994, from 38%, as it appears some of the stubborn newsletter writers also threw in the towel. Bearishness rose to 39.1 from 38% while those looking for a correction rose to 29.4% from 24%. The difference between bears and bulls is 8.1 percentage points, the highest spread favoring the bears since early October, 2001.
Starting on Tuesday, Oct. 8, volume began to pick up and was higher than average the rest of the week. While the market moved back and forth prior to Thursday's strong gains, the increase in volume with a subsequent breakdown in price was an indication that although there was a fair amount of selling, demand was finally there to eat up the supply. When the market churns on high volume and can't go lower, this is usually a sign that a turn is near. This is the opposite of what happens at a market top, when high volume levels fail to extend price gains.
Along with the heavy overall volume, the up/down volume numbers on the NYSE and the Nasdaq were strong on both Thursday and Friday. This is the first time in months were we have seen strong back to back days for up/down volume and suggests institutions are stepping back into the market and that the recent selling has probably run its course.
The market volatility index or VIX hit 50 on Thursday, showing a high level of fear in the options market. This was the highest VIX reading since the market low in July. During the current bear market, the VIX has moved above 50 three times with the other during the climactic low in September, 2001. After the September low 2001 bottom, the market rallied sharply but rolled over to new lows. This is what we have seen with many sentiment indicators during the bear market. They move to extreme oversold readings that lead to a counter-trend or bear market rally. During bull markets, oversold sentiment readings meant that the correction was over and that new highs were just ahead.
The major indexes as well as many stocks face a lot of overhead supply. This should put a cap or speed limit on any potential rally from here. The S&P 500 has initial resistance up to 845, which was the high on the heavy volume day of July 24. The next resistance is 900, and then the August high of 963. The Nasdaq has resistance in the 1200 to 1290 area, the price range from July 24, and at 1423, the high in August.
The intermediate-term downtrend in place since August has run its course, and it looks like we are starting at least another counter-trend rally. The market is likely to pullback next week, and it will be important to see volume decline on any price weakness. After that, further upside is possible. Arbeter is chief technical analyst for Standard & Poor's