By Mark Arbeter
The stock market continued its buoyant ways last week and it is starting to feel like this bullish train will never stop. The S&P 500 and the Dow Jones industrials have now advanced for eight straight weeks while the Nasdaq composite is on a six-week winning streak. The stream of favorable news continues almost unabated and the initial indications of December-quarter earnings seem very strong.
The major indexes have traced out fairly definable up trends during their winning streaks despite the short-term pause over the last week. The S&P 500 has run up to fairly important trendline resistance in the 1,137 area. This trendline is drawn off the January, 2003, and June, 2003, peaks and therefore has contained prices over the last year.
The next piece of resistance, and it has the potential to be an important one, comes from a 50% retracement of the bear market at 1,152. This Fibonacci retracement is a major one and should at least cause a more consolidative pattern to take hold. Beyond that, the top of the current zone of chart resistance that the S&P 500 lies in is up at 1,177.
We have outlined a host of potential stumbling blocks for the major indexes recently and they continue to add up. The somewhat long winning streaks by the indexes are enough to indicate that a pause in the advance should be near. This consistent pattern of higher prices has pushed both short- and intermediate-term technical indicators (based on price) to the most overbought positions in years. While this is certainly a sign of strength and indicative of a bull market, history suggests a consolidation or pullback is needed to alleviate this overbought condition.
The indexes are also giving off overbought signs from volume figures. The Nasdaq's 10-day moving average of down/up volume recently moved down near 0.5, a level that has usually been followed by a break in the advance. The NYSE's 10-day moving average of down/up volume is also overbought, recently getting down near 0.6. These readings have caused the market to at least consolidate in both bull and bear markets. They demonstrate that there has been very little selling pressure of late, which is bullish to a degree, but also that investors are starting to jump on the bandwagon and chase stocks because they continue higher. Eventually this behavior becomes dangerous.
Another short-term concern for the markets -- and one not talked about very often -- is the historical pattern (I looked back to 1990) of either a short or intermediate-term peak early in the year. Some of these were minor while some were major peaks. The other years saw at least a pause in the market. In the years of 2003, 2002, 2001, 2000, 1998, 1992, and 1990, the market saw either a minor or major peak in January. In 1997 and 1994, the peak occurred in February. During 1999, 1996, 1993, and 1991, the market went into a trading range early in the year.
Despite all these warnings, the market is marching to its own drum and the old saw that a force in motion tends to stay in motion is applicable for now. Until the price trend breaks, and breaks badly, all these other potential stumbling blocks are just background noise.
In addition to the strong price trends, market internals remain supportive of higher prices. Both the NYSE advance/decline lines continue to set new recovery highs and probably just as important, gains are coming from a very diverse set of industries. Volume breadth is also strong with bullish trends in NYSE and Nasdaq advancing minus declining volume. New 52-week highs as a percentage of issues traded remains very high historically on both the NYSE and the Nasdaq. This also demonstrates how broad the advance is.
The U.S. dollar index rebounded nicely last week but remains in a major bear market. The dollar index recently fell near the lower trendline ( support) of a downward sloping channel that has contained prices since early 2002. The potential for this countertrend rally is in the low 90 area. This is where chart resistance comes in as well as the top of the channel.
The rally in the dollar led to a sharp decline in gold prices. However, this quick drop by the metal has done nothing to suggest that the long-term trend is still higher. Gold has multiple support levels in the $400 zone and we do not expect that level to give way.
The Treasury bond market also made a big move last week, with the 10-year briefly falling back below the 4.00% level for the first time since late September. While the long-term trend in bonds is still bullish, we believe that the market is in the process of topping out. Because the bull market in bonds has been a multi-decade affair as yields have been falling since 1981, a reversal of this trend is likely to take time. To at least break the trend since 2000, yields would have to break back above the 4.4% level.
An old term from tennis best describes the current market environment: "sweet spot". The term has been used by many market commentators of late to illustrate that almost everything is coming up roses. Can bond yields stay low with the economy growing strongly, the dollar in a bear market, and commodity prices in a bull market? Well, it is happening right now but is not something we envision occurring over the long-term.
Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's