On Dangerous Ground
By Mark Arbeter
The market remains susceptible to further downside action as the continuing meltdown of the once mighty technology and telecom sectors continues to weigh heavily on market psychology. Of the major indexes, the Nasdaq is in the most precarious position -- and is certainly in danger of declining back near the lows witnessed in September, 2001.
For the second straight Friday, the Nasdaq cratered through important support. After taking out the 1700 area on Apr. 26, the Nasdaq broke through the 1630 zone on May 3 and appears headed to the 1473 to 1595 area. This price range, which is slightly above the ultimate low in September, was a large buying zone created by heavy demand by institutions.
The trading last week for both the Nasdaq and the S&P 500 was classic bear market action. The major indexes broke below critical support last Friday and then rebounded weakly back to the breakdown point, which turned from support to resistance. The indexes failed miserably at these new resistance levels, and then turned south with a vengeance. Simply put, the market continues to trend lower on an intermediate-term basis, putting in a series of lower highs and lower lows.
The S&P 500 is holding up much better than the Nasdaq and has not yet taken out the last bit of chart support from the October consolidation. This support runs down to 1050 and if this gives way, the "500" is likely to decline to the 1000 area. This is not far from the Sept. 21 closing low of 966.
While the major indexes still have some distance to travel before they get to the September lows, the Nasdaq 100 (an index of 100 of the largest Nasdaq stocks, reset every December) has given up almost its entire 52.7% advance off the Sept. 21 closing lows of 1126.95. As of midday Friday, the NDX is only 5% above the lows seen last September. The relative weakness of the Nasdaq 100 is simply due to the fact that the largest technology and telecom stocks have been beaten down more than the small and mid cap issues.
In this column last week, we said it was important for issues like Microsoft (MSFT ), Oracle (ORCL ), and Sun Microsystems (SUNW ) that were testing their September lows, to hold and turn higher. That did not happen as both Oracle and Sun crashed right through the levels seen in September (support) and this is not a positive sign for the Nasdaq or NDX.
There has been absolutely no letup in heavy selling by institutions on the Nasdaq. The volume breadth (up-down volume) on the Nasdaq has been terrible, as institutional distribution remains very heavy. The 6-and 10-day summation of up/down volume on the Nasdaq is the weakest since last September.
While volume breadth on the NYSE has not been as bad, it remains in a bearish stance. Until institutions start playing this market on the long-side, as evidenced by strong up/down volume figures over a 5-to 10-day time period, it is best to remain on the sidelines.
Sentiment continues to defy logic with outright bullishness in one very important, intermediate-term market poll. First off, short-term sentiment polls are getting very oversold, and are close to hitting bullish levels. Consensus and MarketVane polls have both moved to only 28% bulls recently and while not at extreme bearish levels, they are getting close. We would like to see Consensus bulls fall to 20% or less and would like to see the MarketVane poll fall to 25% bulls or less.
What continues to worry us is the Investors Intelligence poll of newsletter writers, which continues to lean heavily to the bullish side. The latest readings are 51% bulls and 30% bears. This makes no sense in this type of market environment. At major market lows, usually there is a 40%/40% split, and during times of less favorable market periods, bears can outnumber bulls by quite a bit. We hate to say that until one indicator moves to a certain point, that then a bottom can finally be had, but that may be the case here. Major lows occur when the majority throws in the towel, and that has just not happened yet.
While the market is oversold and countertrend rallies are possible in the near-term, the indexes remain in dangerous positions and further erosion is a good possibility.
Arbeter is chief technical analyst for Standard & Poor's