Stocks Marking Time

The real test for the market will be early 2002, when trading volumes get back to normal

By Mark D. Arbeter

The major indexes are benefiting from the usual end-of-year boost but they remain stuck within a fairly narrow sideways consolidation. The S&P 500 has been confined to the 1114.50 to 1173.62 area while the Nasdaq has ranged from 1918.50 to 2065.69. The latest strength has come on very light volume, not a positive but something expected during this time of year.

The real test for the market will be early next year, when trading volumes get back to normal. It will be important for the indexes to hold the recent lows as they came down to or near their respective 50-day exponential moving averages, which usually provides good support in a rising market. Each index has also retraced about 23.6% of the rally that began off the lows seen on Sept. 21, a typical pullback during an advance.

The S&P 500 is heading back into the bottom ledge of very heavy resistance that starts at 1170. The index ran right up to that level in early December and was turned away. The next time the index gets a chance, possibly early next year, it will be important for the "500" to start to break through this lower area of resistance and begin to chew through some of the heavy overhead supply.

Breaking through heavy resistance is analogous to breaking down a door. The first run at the door usually yields little, so you back up again and make a little progress each time you hit the door. The market is no different.

The Nasdaq has already busted through the lower area of major resistance that started at around 1930 and has begun the process of eating through the overhead supply created by the sideways consolidation over the past summer. Unfortunately for both the Nasdaq and the "500", the consolidation area was fairly wide, so it will probably take months if not much longer to deal with this resistance.

The top of this consolidation for the Nasdaq runs up to 2328 and for the "500", up to 1313. As we have said, due to the large overhead supply the market is dealing with, gains from here will be labored.

The market should continue to make headway in the short term as the seasonal factors are favorable. One recent positive is that the stocks that have broken out to new highs (either 52-week or all-time) have been able to hold these gains. New leadership is emerging in the technology and biotech area, and it is coming from small and mid cap names.

The road ahead for the prior bull market leaders (primarily the large-cap techs) will be a tough one as they must deal with a mountain of supply overhead. The market is going through a changing of the guard and stock selection going forward will be critical.

Arbeter is chief technical analyst for Standard & Poor's

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