Buy Stocks, Sell Bonds

Stocks will benefit from the Fed's easing stance -- and lots of cash on the sidelines. But bonds have come too far, too fast

By Mark Arbeter

The Nasdaq is finishing up its second straight week of gains for the first time since the late August, early September timeframe. The technology heavy index also broke above a downward sloping trendline that has existed since early November, and is very close to breaking above trendline resistance that has contained the Nasdaq since early September.

In addition to the favorable price action, volume figures have been very impressive. Up/down volume, critical to the Nasdaq, has improved quite dramatically and suggests that the index has probably entered a new intermediate-term advance. In fact, two separate models we run using up/down volume on the Nasdaq have flashed buy signals over the past 7 trade days, the first positive signals from these models since the Summer.

The limiting factor going forward is the chart patterns of the major companies in both the Nasdaq and the S&P 500. Most large cap techs are still in basing patterns, some near the bottom of their bases, so their is an awful lot of supply to work through. This should to a degree, limit the power of any new advance. However, reviewing charts of beaten down stocks following 1998's bear market, many issues surprised on the upside, slicing more quickly through supply than normal historical patterns. We believe this occurred because the Fed was in an easing mode which is the same situation the markets are in now.

So despite all the overhead supply, an aggressive Fed might lead to a less choppy market rise and to more of a sustainable, consistently sloping advance. Either way, the market is heading higher.

We have turned negative on the treasury bond market over the past couple of weeks for a couple of reasons. To some extent, the bear market in stocks has helped the bond market as investors pulled money from stocks and put it in bonds. Secondly, treasury bonds got a boost from weakness in other types of bonds, especially lower-rated corporate bonds which got hammered along with stocks.

Third, sentiment towards treasuries has gotten extremely bullish with the latest 2 weekly polls reaching 85% and 80%, respectively. This is the highest bullish reading since the treasury market high in October 1998. And finally, bonds broke out of an already bullish channel, into an unsustainable slope, which is usually a bearish pattern.

Some sentiment readings on stocks of late have shown just the opposite of bonds. The consensus poll, bulls on stock index futures, fell to near 20% for three weeks straight, the lowest level of bulls since Fall 1998. From a contrarian view, this is very bullish.

With the Fed in an easing mode and plenty of fuel on the sidelines, we would be more aggressive towards stocks as the market is likely to surprise on the upside over the near to intermediate term.

Arbeter is chief technical analyst for Standard & Poor's

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