Looking for a Lift

With sentiment still too bullish, stocks probably will have to go lower before they can mount any kind of sustainable uptrend

By Mark Arbeter

Stock market doldrums -- usually associated with the late Summer months -- have appeared early this year. Not only has the market traded in a very tight range of late, but daily average volume has dried up to the slowest level since August (excluding holiday periods).

The major indexes broke to new lows last week and appear headed for a test of the lows seen towards the end of February. For the Nasdaq, this equates to a decline into the 1700 area. The S&P 500 should find support in the 1074 to 1100 zone. If the tests occur on light volume, which we expect, and there is a pickup in bearish sentiment, the market should then be able to turn higher.

However, the rebound will run into many layers of chart resistance, so the market's apathetic trading pattern is likely to continue. Resistance for the S&P 500 comes in between 1130 and 1154, with very tough resistance in the 1170 to 1180 area. Overhead for the Nasdaq first appears in the 1807 to 1865 zone with further chart resistance at 1930.

Volume breadth models remain bearish, indicating that institutions have been lightening up on their positions. Fortunately, the net selling by the institutions has been light, but with an absence of buyers, light volume or selling has been able to push the market lower. For the market tone to improve however, stocks probably will have to go lower in a more dramatic fashion before they can mount any kind of sustainable uptrend. A quick move lower would alleviate the sentiment problems, which remain way too bullish, and also set up a nice oversold environment from which stocks can lift.

The bullish sentiment that is present in some of the longer term investment polls continues to be a source of concern. Investor's Intelligence, a poll of newsletter writers, is showing 54.6% bulls, the highest percentage since February, 2001. Following this level of bullishness last year, the market then proceeded to decline fairly sharply into the March/April 2001 lows. Bearish sentiment on the Investor's Intelligence poll remains too low at 28.9%. The ratio of bulls to bears has increased to 1.89 and when this ratio rises to 2.00 or higher, the market has either gone sideways or has moved into a healthy correction.

Shorter-term sentiment readings are neutral but have at least been moving in the right direction as the market has declined. The Consensus poll is 33% bulls, down from 45% bulls just three weeks ago. MarketVane is showing 38% bulls, down from 44% the week before. Both these polls are in neutral territory. Consensus would have to fall to 20% bulls and MarketVane would have to decline to 25% bulls for these polls to turn bullish.

CBOE put/call ratios are also moving in the right direction and while still in neutral territory, they are approaching bullish levels. The 30-day CBOE put/call ratio has increased to 0.75, near a bullish reading of 0.80. The 10-day CBOE put/call ratio has moved up to 0.77, closing in on a bullish level of 0.85.

Short-term, it looks like the major indexes will trade down to the lows seen in February. Our intermediate-term call remains the same, with the market confined in a fairly narrow trading range.

Arbeter is chief technical analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.