By Mark Arbeter
The stock market's short consolidation has ended, as the major indexes broke to new recovery highs last week. Both the S&P 500 and the Nasdaq indexes moved to four-year highs while the Dow Jones industrial average moved to its highest level since March. There was some profit taking on Friday, July 29, as crude oil prices spiked back above $60 and Treasury yields rose to their highest level in over three months.
The S&P 500 rose to 1243.72 on Thursday, July 28, the highest close for the index since June 12, 2001. The "500" has moved into an area of chart resistance, from back in 2001, that runs between 1240 and 1315. In addition, there is a huge zone of chart resistance, in our view, from 1998, 1999, 2000 and 2001, that begins at 1240 and runs clear up to the all-time highs. In our opinion, this will be a tough area for the S&P 500, and will take considerable time to work through.
As well as chart resistance, there are two trendlines that come in around the 1260 level. The first piece of trendline resistance is drawn off the highs of 2004 and the recent highs posted in 2005. The second trendline is drawn off the lows in 2003 and 2004. The next key Fibonacci retracement, 61.8% of the bear market, would target the 1253 level.
On the downside, key chart support lies at 1225, which was the recent breakout area. The 20-day exponential moving average is at 1224, while the 50-day exponential moving average lies at 1209. Trendline support, off the lows in May and July, comes in at 1220. Because of the strong levels of support just below, we believe any pullback will be mild over the near term.
The Nasdaq closed at 2198.44 on Thursday, July 28, the best close since June 8, 2001. The index continues to struggle with chart resistance up in the 2190 to 2200 area, and has been unable to break cleanly above the highs posted back in the beginning of the year. Immediately above current prices at 2210 is trendline resistance drawn off the two peaks in 2004. A break above 2210, which we see in the near term, would then bring the 2250 to 2330 area into focus. This is chart resistance from back in 2001. Minor chart support lies in the 2150 area with more substantial chart support in the 2100 zone. The 20-day exponential moving average lies at 2148 while the 50-day exponential moving average comes in at 2102.
While momentum has been strong since early May on both a daily and weekly basis, we are starting to see some negative divergences on some of the daily charts. The daily stochastics oscillator on both the S&P 500 and the Nasdaq are very overbought, and the stochastics based on the Nasdaq are starting to put in lower lows despite higher highs in prices. In addition, the 6-day relative strength index (RSI), after getting very overbought, has also put in a series of lower lows.
Weekly momentum is also fairly overbought, but these technical indicators have yet to trace out any negative divergences typically seen at intermediate-term highs. In our opinion, momentum is suggesting that a near-term pullback is possible but that there is still time and room for the indexes to extend themselves into the next month or so.
For the most part, market sentiment remains fairly to extremely bullish, which eventually could lead to some trouble for the stock market, in our view. Investor's Intelligence poll of newsletter writers is showing 55.9% bulls, the highest since February. Bearish sentiment is fairly low at 22.9%. In the options market, the equity put/call ratio has moved to fairly low levels, as investors have increased their level of bullishness and increased their call buying. The 5-day, 10-day, and 30-day equity-only put/call ratios have moved to their lowest levels since January 2004, just prior to the pullback we had during that year. However, CBOE put/call ratios are in neutral position, so we are not getting the usual confirmation from the options market.
The Treasury market got hammered on Friday, July 29, pushing yields on the benchmark 10-year note to 4.29%, the highest level since Apr. 21. The 10-year Treasury yield is sitting above its 200-day exponential moving average, and we continue to believe yields have further to go on the upside. Trendline support, drawn off the yield peaks in 2004 and 2005, comes in at 4.6%. Chart support also lies up in this area. Taking the width of the latest double bottom reversal formation and adding it to the breakout point also gives us a target up in the 4.6% zone.
As we have said recently, despite the reversal in yields to the upside, bond sentiment as measured by MarketVane and Consensus remains pretty bullish. In our view, that could be a problem for bonds over the next couple of months.
Crude oil prices spiked back above the $60 level on Friday and are sitting less than $1 below the all-time high set in the beginning of July. The mini-pullback in crude during the month of July alleviated an overbought condition in the oil market and, in our view, sets the stage for new highs. During July, crude oil fell right back to short-term chart support in the $57 area and held very nicely. The 50-day exponential moving average also lies in this area. Long-term chart resistance lies up near $65 and we believe this is achievable over the next month or so. We then would expect a fairly decent-sized correction.
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
|A-||Above Average||D||In Reorganization|
S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.
S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.
Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.
In the U.S.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
For All Regions:
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.
Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY.
Other Disclosures This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").
The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.
Disclaimers This material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. 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.
For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.
Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations.
Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's