By Mark Arbeter The market paused early last week before a late-week rally propelled the S&P 500 index to its highest level since August 27, 2001. The Dow Jones industrial average and the Nasdaq composite index have broken above key trendline
resistance but remain below levels posted earlier in the year. We believe both these indexes are in the process of completing their bases and have the potential to break out to new recovery highs before the year is out.
Last week, when the S&P 500 broke out of range that had existed since the beginning of the year, we issued a technical target for the index up at 1,253. We believe this target is achievable by the middle of 2005. We would like to review how this target was arrived at and note that two completely different techniques were used to come up with the 1,253 level. The first technical technique that was employed adds the width of the consolidation, which was 95 points, to the top of the range of 1158. This is a very basic technique to calculate targets and can be used for indexes as well as individual stocks.
The second technical technique to identify potential targets is with the use of Fibonacci retracement levels. Leonardo Fibonacci was a 12th century mathematician who discovered relationships with numbers while studying the Great Pyramids of Egypt. The most common Fibonacci retracements are 23.6%, 38.2%, 50%, 61.8% and 100%. It has been found that after a large market move, prices will often retrace a portion of the original move.
The S&P 500 retraced 50% of the bear market when the index peaked earlier this year. From a technical perspective, the 50% retracement area provides both excellent
support and resistance when looking at intermediate-and long-term market moves. The next key Fibonacci level would be a 61.8% retracement of the bear market and that would also target the 1,253 zone.
As we have talked about for the last couple of months, we continue to be impressed by the breadth of the market. This can be seen both on an individual stock basis and from a subindustry perspective. Stocks and subindustries from a diverse group have broken out to new 52-week highs lately, confirming the depth of the market's strength.
Delving into the many subindustry charts, we are seeing many breakouts within the consumer discretionary, financial, industrial, material, energy, utility, and telecommunications groups, as well as positive action from some information technology segments. For the most part, consumer staples, healthcare and some information technology are the only sectors that look negative to us from a technical perspective. While we do not have statistics on subindustry strength, we believe this is a bullish development with so many different pockets of strength.
The market has made quite a run since late October, rising over 7% since Oct. 25. While many believe the market has moved too far too fast, we disagree. The beginning of most major intermediate-to long-term stock market advances occur in violent, upward fashion. This catches many investors by surprise -- and often under-invested. One way to measure the markets price thrust is to calculate some rate-of-change (ROC) measurements. The 10-day ROC (ending Nov. 5) for the S&P 500 was 6.4%. This is the highest 10-day reading, coming out of a correction or a pullback, since March, 2003. High ROC readings after an extended intermediate-term advance would most likely signal an upside exhaustion, but when they occur at the start of a potential move, they have usually been a bullish sign.
Another sign of a short-term overbought condition can be seen with the RSI or relative strength index. The 14-day RSI for the S&P 500 recently hit 74 on Thursday, Nov. 11, exceeding all of the readings during the three rallies in 2004. This is also the highest 14-day RSI level, after a correction, since November, 1999. Looking at weekly data, the 14-week RSI is around 64, not yet overbought, and with room to go higher in our opinion.
The Nasdaq took out another piece of chart resistance at 2,050, or the high from June. The next area of chart resistance is from the April high at 2,080, and the final piece is at the top of the range up at 2,153. If the Nasdaq can break above the top of the range at 2,153, a target of 2,555 would come into play. This is arrived at by adding the width of the correction to the top of the range.
The Nasdaq retraced about 23.6% of the bear market when it peaked in January. This represents the first key Fibonacci retracement target. The next Fibo retracement would be 38.2% of the bear market and this would target the 2614 level. There is also a fair amount of chart resistance in the 2,500 to 2,600 area from back in 1999 and 2001.
We think the Treasury bond market is close to breaking down as some important pieces of support have been taken out and weekly momentum indicators are close to turning bearish. The 10-year Treasury note broke above a bullish trendline late last week. This trendline has been in force since June. The 10-year yield also broke back above its 100-day exponential moving average, another negative in our opinion. The 10-year found support in the 4.25% area last week and then rallied a bit on Friday, Nov. 12. We think a strong break above 4.25% will be the beginning of a move for the 10-year back near the highs from earlier in the year, up near 4.7% to 4.8%.
As of September 30, 2004, SPIAS and their U.S. research analysts have recommended 29.2% of issuers with buy ratings, 58.5% with hold ratings and 12.3% with sell ratings.
5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
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Past performance is not necessarily a guide to future performance.
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This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
Readers should note that opinions derived from technical analysis may differ from those of our fundamental recommendations. Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's