By Mark Arbeter
The market successfully tested the early May lows in another attempt to trace out an intermediate-term low. However, the bounce off support levels has been unspectacular on both a price and volume basis. The low volume test suggests that the recent bout of selling has probably been exhausted in the short-term, and now buyers must re-emerge for any kind of sustainable uptrend to begin.
Unfortunately, that is unlikely, as trading volumes will remain light as we move into the summer months; and the market continues to face the most overhead supply in decades.
The S&P 500 traded at 1054 on Thursday, May 30, very close to the low close seen on May 7 of 1049. From the intraday low on Thursday, the index rebounded less than 2% into the close on Friday, not the kind of strength off a potential double bottom that inspires a great deal of confidence. Furthermore, trading volume on the NYSE on May 30 was about average (near its 50-day moving average) and was well below average on Friday, May 31. For a confirmation that a double bottom is complete, the most recent high of 1106.59 will have to be taken out on a closing basis.
The Nasdaq's early May closing low was 1574, with the intraday low print on Thursday of 1607. The Nasdaq is still in poorer technical shape than the "500", and its rebound off the intraday low Thursday into the close of the week was anemic. Nasdaq volume on both Thursday and Friday was below average. A double bottom reversal formation on the Nasdaq will be confirmed with a close above 1741.39. While the action has not been great technically, at least the market has stopped its most recent slide in the face of some pretty abysmal news.
While we have been forecasting that the recent lows will hold, a failure to rebound off these support levels early next week would place that forecast in jeopardy. If the lows were broken, it would set up a test near the September, 2001, lows. For the S&P 500, heavy buying took place between 966 and 1008, so that zone represents strong support. Also, the October, 1998, low was only slightly below this area at 923. If the Nasdaq takes out the May lows, the index has very good support in the low 1400 area.
Market sentiment remains mixed despite the constant price erosion since mid-March. There was an extreme reading this week on the CBOE put/call ratio as it hit 1.07 on Tuesday. This was the first 1.00+ reading on the p/c ratio since the market bottom in February. However, both put and call volume on Tuesday were well below average, so the total reading that day carries little, if any, weight. At most intermediate-term bottoms, there are a series of 1.00+ readings for the CBOE p/c ratio and they usually occur on heavier than average volume.
Short-term sentiment polls (Consensus, MarketVane) are still showing a high degree of anxiety toward the market, with both readings still below 30%. The American Association of Individual Investors poll is finally showing signs of fear. AAII bulls have fallen to 26.19%, the fewest bulls since October, 1998. Bearish sentiment has increased to 40.48%, the highest level since early November, 2001. However, the Investors Intelligence poll of newsletter writers remains to optimistic, with 53% bulls and 29% bears.
As we mentioned a couple weeks ago, market lows have occurred almost every four years like clockwork. Many of these market bottoms were major. The last major low was in 1998, so a cyclic low is due sometime in 2002. Taking a look back to 1970, almost all of the major stock market lows (defined as a final bottom which preceded the next bull market, not necessarily the price low) have been in the second half of the year, between August and December. The one exception was the 1990-91 low, and that was in early January. Based on cycle analysis and seasonal market lows, the possibility of a major low later this year looks pretty good.
Arbeter is chief technical analyst for Standard & Poor's