Stocks: Turn Up the Volume

Current trading levels signal to S&P's Mark Arbeter that despite some strong days, the market lacks significant institutional demand

Something's missing from the stock market's relatively good performance in the last few days: "Normally at a market turn, you want to see stronger volume levels," says Mark Arbeter, chief technical analyst and senior investment officer for Standard & Poor's. And he has yet to see "clear evidence" of institutional demand.

The sectors Arbeter likes on a technical basis, however, include energy, utilities, basic materials, and most of the health-care area (excluding pharmaceuticals). "There have also been some pockets of strength in industrials and consumer staples," he adds.

MIGHTY MARTHA?

  He believes that for the next three to six months, the following stocks will be good picks: Nextel Partners (NXTP ), Commercial Metals (CMC ), AK Steel Holdings (AKS ), Occidental Petroleum (OXY ), Intuitive Surgical (ISRG ), Affymetrix (AFFX ), and Integra LifeSciences Holdings (IART ).

Arbeter also sees a big uptrend in the controversial Martha Stewart Living (MSO ), which has had strong volume on the upside and whose charts look bullish. Moreover, it faces a lot of bearish sentiment, which he also interprets as a bullish sign.

S&P's chief technical analyst made these and other points in response to questions from the audience and from Jack Dierdorff of BW Online at an investing chat presented Feb. 1 by BusinessWeek Online and Standard & Poor's on America Online (AOL ). Following are edited excerpts from this chat. AOL subscribers can find a full transcript at keyword "BW Talk."

(Mark Arbeter is a Standard & Poor's equity research analyst. He has no ownership interest in, or affiliation with, any of the companies under discussion in this chat. All of the views expressed in this chat accurately reflect the analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this chat. For required disclosure information and price charts for all S&P STARS-ranked companies, go to spsecurities.com and click on "Investment Research" and then on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts.")

Q: Mark, the broad market did quite well the last two days. Do your charts show any evidence that the strength can continue?

A:

Well, the market is trying to make a turn right here after a very weak January. While some evidence is positive, including the price movements of the major indexes, we haven't yet seen clear evidence of institutional demand, and that [absence] can be seen in the trading volumes so far this week. Volumes have been about average to a bit above average. Normally at a market turn, you want to see stronger volume levels.

Q: How's Pfizer (PFE ) looking now?

A:

Pfizer is still in an intermediate-term and long-term downtrend. There's very little sign that the stock has bottomed out yet on a technical basis. Therefore, I would probably stay away from it. What you want to see is some type of bullish reversal formation, and the stock has yet to do that.

Q: Your opinion, please, on eBay (EBAY )?

A:

eBay is in the midst of a major correction after huge gains in 2003 and 2004. It has fallen to an area of good chart support in the $70-to-$90 area. After such a big decline, I would wait for the stock to base or go sideways for at least four to eight weeks. And if it can turn higher out of that base, it could be an interesting situation. But at this point, it's still too early to start accumulating the stock.

Q: A technical question for a technician -- what's your opinion on Elliott Wave theory and its relationship to Fibonacci sequences? Do you believe this is a viable method of analyzing trends?

A:

The study of Elliott Wave is basically the study of cycles and waves within a trend. I don't use Elliott Wave analysis in my work. However, I use Fibonacci analysis quite often. After an intermediate-term advance, I will look at Fibonacci retracement levels for potential downside targets. And, in addition, after an intermediate-term decline, I will look at Fibonacci retracement levels to gauge the potential upside.

It was interesting following the bear market that the S&P 500 retraced 50% of the bear market and then stalled. Late last year, we were able to jump above the 50% retracement level. In the next Fibonacci retracement, the target for the S&P 500 is 1,253, and that would be a 61.8% retracement of the bear market.

Q: Any thoughts on Station Casinos (STN )?

A:

The stock is in a long- and intermediate-term uptrend. STN recently broke out to a new all-time high on heavy volume. This formation is usually very bullish. So if I owned it, I would stay with it.

Q: Speaking of casino stocks, do you like MGM Mirage (MGG )?

Ar:

MGG has had a real strong move since August. The stock looks like it has entered a period of consolidation. If the stock can base for the next month or two and then break out to a new high on strong volume, then I would probably move back into it. Because it's so extended, at this point I would wait for a new breakout.

Q: What do you think of Wrigley (WWY ) and Hershey (HSY ) as holdings for the next six months?

A:

The technicals on WWY are bullish. The stock broke out to a new all-time high in January. This was accompanied by very heavy volume. So the technicals on WWY are bullish. HSY also looks positive from a technical standpoint. The stock has broken out to a new all-time high on heavy volume. So both charts look very good from a technical perspective.

Q: Some pharmas are out of favor -- what's your take on Amylin (AMLN )?

A:

The chart on AMLN looks moderately constructive. It's in a basing process. If it can jump back above the $26 level, the technicals would turn much more bullish. Relative to other pharmaceutical stocks, this one looks pretty good.

Q: How will Martha Stewart Living stock do in the near future?

A:

MSO is in a strong uptrend. Today it hit a 52-week high. Volume has been pretty strong on the upside. And the chart looks very bullish. The other positive aspect to this story is the high degree of bearish sentiment toward the stock. Many times when a stock is in a strong uptrend and sentiment toward the shares is bearish, this can provide a very bullish scenario for the shares.

Q: Anything positive on airlines? And your opinion, please, on Airtran (AAI ) and America West (AWA )?

A:

The technicals on both of these airline stocks are still negative. The airlines as a group are trying to put in long-term bases, but they continue to be hurt by the strong technicals in crude oil prices.

Q: What sectors do you favor for the next six to nine months?

A:

The sectors I like include energy, utilities, basic materials, and most of the health-care area (excluding pharmaceuticals). There have also been some pockets of strength in industrials and consumer staples.

Q: Which industry group has the most positive upward momentum at this time?

A:

Probably some of the subindustries within the energy area. There's also strong relative strength in the materials and health-care areas.

Q: What are some good short-term buys?

A:

I like Nextel Partners, Commercial Metals, AK Steel Holdings, Occidental Petroleum, Intuitive Surgical, Affymetrix, and Integra LifeSciences Holdings.

Q: Would these buys also be good for the long term, or is that a different list?

A:

Most of my stock picks are probably good for three to six months. The great thing about technical analysis is if a stock starts to go against you, you're able to change your opinion very quickly. That's an area where technical and fundamental analysts disagree. It's very important as an investor to watch the market on a daily basis. All the stocks that I mentioned could roll over within the next couple of weeks. And, as a technician, I would see this and make the necessary adjustments.

Q: Mark, do your technical views often clash with those of the fundamental analysts at S&P?

A:

Yes, they do. The most frequently the technical and fundamental analysts will differ is at major turning points in the market. For example, the stock might begin to roll over after a long advance and therefore turn the technicals negative. But while this is going on, the fundamental news will continue to be positive. And vice versa at a market bottom -- the technicals will begin to improve before the fundamental news improves.

The other instance where we disagree is when a stock becomes overvalued, according to our fundamental analyst. In many cases, the stock is in a strong uptrend -- and therefore technically bullish. The fundamental analyst will look at the valuation and see this as unfavorable. So, at that point you have strong technicals and an overvalued fundamental situation.

Q: Do you think Microsoft (MSFT ) can break $30 this year?

A:

Possibly. The $30 level is key chart resistance. But once again, this is another example of a stock in a long-term basing formation. So intermediate- to long-term technicals are neutral at best.

Q: Good earnings news here -- have you already talked Google (GOOG ) to death? I'm wondering what the outlook is now.

A:

Google is up more than 8% in after-hours trading. If Google can close at this level tomorrow, which is $208, that would equate to a breakout on the chart, and that would be very bullish from a technical perspective.

Q: Your opinion, please, on Navarre (NAVR ) and Novell (NOVL )?

A:

NAVR looks very negative from a technical basis. The stock has broken key chart support. It has also broken below key moving averages. Volume has been heavy on the downside. There's little chart support until you get down to the $7 area. So it looks very negative from a technical perspective.

NOVL is in an intermediate-term decline -- it has broken below some important chart support levels and also below some important moving averages. The stock looks like it's headed for support in the $4 to $5 area.

Q: To what extent do you think the average investor should lean on technical analysis? And the best way to do it?

A:

I think he should use technical analysis in conjunction with fundamental analysis on a 50/50 basis. There are many terrific books on technical analysis, and there are also a host of very good Web sites where the average investor can educate himself.

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