By Mark Arbeter
The stock market was able to lift itself from its recent doldrums last week, with the advance being a little quicker and stronger than we expected.
While the overall volume has not been much to write home about (it was finally decent on the Nasdaq on Friday, Apr. 2), a fair amount of leading stocks have broken out to new recovery highs of late, while other stocks continue to trace out nice basing formations. We believe the indexes will run up to their recent highs over the next month, but still think a pause or pullback will occur in the near-term.
During last week, the major indexes went a long way in repairing the technical damage suffered over the last month or so. The Standard & Poor's 500-stock index blew right through short-term moving averages such as the 10-day and 20-day, and also broke above the 50-day exponential moving average, which is considered an intermediate-term average. The 50-day currently lies at 1,123, and if the "500" does experience a pullback, this average should represent good support.
The index also took out minor trendline resistance early in the week. This bearish trendline had contained prices since early March. This leaves the S&P 500 smack in the middle of chart resistance that runs from 1,122 to 1,163. This resistance is from the price consolidation traced out earlier in the year and will probably halt or slow the advance over the next week or two.
The Nasdaq, which is in a weaker technical condition than the "500", also broke above some key levels of resistance, including its 50-day exponential moving average and a bearish trendline which had contained prices since late January. The Nasdaq has also run into some chart resistance that runs from 2,030 to 2,095. Any pullback by the Nasdaq should be limited to the 1,950 to 2,000 area.
The technical conditions of the biotechnology and semiconductor industries, sometimes drivers of the Nasdaq, have improved as well. The AMEX Biotech index (BTS.X ) pulled right back to great support in the 500 area and looks poised to move to new recovery highs above the 561 level. The Philly Semiconductor Index (SOX.X ), correcting much more than the biotechs, broke above its 50-day moving average and bearish trendline that contained prices since late January. The index has some chart work to do before a more positive stance can be taken, but things are moving in the right direction.
During the latest market pullback/correction, we had mentioned that money rotated back into safer havens, very typical of a correction during a bull market. The Morgan Stanley Consumer Index (CMR.X ) outperformed both the Morgan Stanley Cyclical Index (CYC.X ) and the S&P 500 from late January until Mar. 10.
Since Mar. 10, the cyclicals have taken back a leadership position from both the market and the consumer stocks. This may be a continuation of the longer-term trend as cyclicals outperformed both the market and the consumer index fairly steadily from March 2003 until January of this year.
This pattern can also be seen when comparing the Nasdaq and the S&P 500. The Nasdaq outperformed the "500" from the market bottom in October, 2002, until January 20, 2004. The "500" then took over from the more volatile Nasdaq, and led until Mar. 23. Since then, the Nasdaq has started to outperform once again, and we suspect that if this rally has some legs, the Nasdaq will once again be in a leadership position.
After the unexpectedly strong March payroll number announced on Apr. 2, and subsequent plunge in bonds, financial stocks really took it on the chin. With the financials being the largest component of the S&P 500, this potential trend (long overdue in our opinion) of higher interest rates could weigh on the financials and limit the near-term gains in the "500" vs. the other major indexes.
Speaking of bonds, the yield on the benchmark 10-year Treasury note spiked from 3.9% to 4.14% following the March employment report. The 24 basis point increase in yields is the largest since December 5, 2001. This puts the 10-year yield right back into an area of strong chart support that runs from 3.91% to 4.6%. We believe that the 10-year Treasury will have real problems if it breaks above the 4.25% level. This would break the trend of lower yield highs that has existed since September, 2003.
As we have discussed recently, market sentiment data improved quite a bit during the latest weakness. In other words, sentiment polls backed off from their bullish extremes while some put/call ratios rose to their highest levels in over a year. During last week, specifically on Wednesday, Mar. 31, CBOE put/call ratios spiked quite a bit, despite only minor losses on the major indexes. The CBOE Equity P/C ratio rose to a fairly extreme level of 1.1 on the Mar. 31 and the total CBOE P/C ratio was also very high at 1.31.
While we do not know if these numbers were distorted by trading on the last day of the quarter, it has to be bullish when P/C ratios spike when the market is basically doing nothing.
Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's