Stay Nimble on a Rocky Wall Street

Forget buy-and-hold investing, says Mark Arbeter, S&P's chief technical analyst. He thinks the bear market could still hit new lows

The bear market isn't over -- and, in fact, could test the lows of July and possibly plunge below them. So warns Mark Arbeter, senior investment officer and chief technical analyst for Standard & Poor's, who thinks the S&P 500-stock index (which closed the week of Sept. 6 at 894) could go as low as the high 600s. But Arbeter observes that the bear could run its course by yearend.

With all the uncertainties hanging over the market, Arbeter considers technical analysis more valuable than ever in predicting what stocks will do. He also advises that this is no time for investors to buy and hold. Nimble trading in and out is the way to go, he says, and if that isn't for you, stay on the sidelines until an upturn develops.

From a technical point of view, the only sectors that look promising to Arbeter now are housing, HMOs, the gold and steel stocks, and small financials. But most other sectors are in a downtrend on his charts.

Arbeter made these and other remarks in a chat presented Sept. 5 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts from this chat follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Q: Mark, the bear seems to be on another rampage. What do your charts tell you about where we're going in the market?


Over the next couple of months, I think we will retest the July 24 lows on the S&P 500. The price range that's critical at this point is 776 to 844, and that was the price range set July 24. For the Nasdaq, that equates to a test of the 1,200 level.

Q: September is usually a dreary month for the market. With the September 11 anniversary and the seasonal weakness, do you think investors will just stay on the sidelines for a while?


Yeah, I think not only will they stay on the sidelines but they're likely to do more selling as the market slides back down to the July lows. And I think, because we're in the worst seasonal time of the year, there's a good chance the market will break through those July lows and set new bear-market lows.

Q: Where do you see the S&P 500 at the end of this month?


I think there's a good shot that, by the end of the month, we will have already gone through the July lows, and that would suggest a move down to the high 600 area of the S&P 500.

Q: Mark, one of our BW colleagues today quipped that the market is caught between Iraq and a hard place -- how much of a factor do you think uncertainty about Iraq action is for investors?


I think that's one of the many factors that are weighing on market sentiment right now. The other important factors are certainly the uncertainty about corporate earnings, the uncertainty about the economy, the inability for investors to trust what's coming out of corporations at this point, etc.

Q: The Nasdaq closed today at 1,251 -- are you saying that it's approximately at its low?


No, not at all. I believe that the Nasdaq will go back down and test the lows around 1,200, and I think that there's a good possibility the Nasdaq will break new bear-market lows. And if that happens, the next area of chart support for the Nasdaq is between 1,000 and 1,075.

Q: Do you think buying the S&P 500 on the dips and holding for a period of five years makes sense in the current environment?


Now as a technical analyst, I try not to be a buy-and-hold investor. More of my recommendations are for trading the market -- in other words, moving in and out of the market. This is not a great environment for the buy-and-hold investor, and the likelihood that we will see new bear-market lows would suggest to me that you should wait until there are more clear signs that this bear market is over and that a new bull market has started.

Q: Mark, what indicator are you watching most closely now? Volume? The volatility index?


Basically, the most important indicator that a technician can watch is just the price action of the market itself. In following the price action of the market, you can very clearly see that the major indexes continue to trace out lower highs and lower lows. This is quite simply the definition of a bear market.

The second most valuable tool or indicator that a technician looks at is volume. The volume indicators as of late are indicating that institutions once again are selling stock. This is certainly not a positive, and it suggests that we have further to go on the downside.

Q: When moving in and out, how long do you wait before moving on if you haven't seen the desired result?


I think that question could be answered quite simply by the action of the individual stock. I prefer to buy stocks that are breaking out to new highs, and a clear sign of when to get out is if that stock fails and pulls back to its base. That may happen in a week's time, or it may never happen.

As a technician, you let the market tell you what to do. If the stock is acting fine, then you stay with it. That could be for a three- to six-month time period, or it could be a week.

The most important thing when making a buy decision is having a stop loss in mind. If the stock, for instance, drops 8% to 10% below your purchase price, that's a good sign to get out. It means you made a mistake, and you should go on to something else. I think that's the most important lesson investors should learn, especially considering what has happened over the last couple of years.

Q: With the market at the mercy of so many external events, is technical analysis of any use?


I think it's of more value than it ever has been. There's very little trust in corporate earnings, there's a great confusion over what the true valuations of the markets are. And by using technical analysis, you're letting the market tell you what to do. Most importantly, you are staying with the trend. And the trend right now is down.

Q: What are your thoughts on how long this bear market will last?


I think that there's a decent possibility that the bear market will end sometime by the end of this year. The reason is that the market tends to put in major bear-market lows once every four years. The last major bear-market low occurred in 1998, and this four-year cycle has done a terrific job of predicting market bottoms. I would like to add that it's very difficult to call the actual price bottom of a bear-market low, and it's very difficult to call it from a timing perspective.

However, what we have seen in the early stages of bull markets is tremendous price gains over a 50- to 100-day period, and that's usually accompanied by very strong volume. We have not come close to seeing this kind of price performance as of yet. We saw tremendous price strength coming out of the 1932 bear market, coming out of the '73-'75 bear market, coming out of the 1982 bear market, as well as the 1990 and 1998 bear markets.

So that's something I will be looking for. It's much safer to get involved in the market after it has bottomed, much more dangerous to try to invest as the market continues to fall.

Q: Mark, are any sectors showing particular strength (or weakness) in their charts lately? I see the financial stocks have gotten hammered the last few days.


The sectors that look the best technically are the housing stocks, the HMOs, the gold and steel stocks, and small financials. Now this is a very limited section of the market, so it has been very difficult to pick stocks to accumulate. On the downside, many sectors are showing a lot of weakness, including the large financials, as Karyn just mentioned. Of course, technology and telecom stocks are likewise weak, as well as utility stocks. So for the most part, most sectors are in downtrends right now.

Q: What do you look for in the technical charts as a buy signal for a stock or stock sector?


Primarily, I look for an individual stock that has been in an uptrend and then enters a two- to four-week consolidation or sideways pattern, and then I look for that stock to break out of that consolidation pattern on heavier than average volume.

I also like to see the stocks of an entire industry moving together. For instance, it wouldn't be positive if one HMO stock was acting well and broke out to a new high, when the rest of the group was setting new lows. When the whole group is moving up together, that tells me that institutions are accumulating that particular sector, and therefore it most likely suggests that they see strong fundamentals in the future.

Q: I agree that it's too early to start buying aggressively, but what about rearrangement of 401(k) monies?


If one has a very small allocation to equities at this time, I would remain on the sidelines until further evidence that the bear market is over and a new bull market has begun. If one is still heavily invested in equities, I would cut back immediately and sit on the sidelines as well until the technicals improve.

I think investors have to change their focus until another bull market begins. The mantra of buying and holding stocks does not work in all market environments, and I think we have entered more of a trading environment.... If you're swift enough, you can try to catch the counter-trend rallies that develop, but you have to be very quick and nimble, with one foot out the door.

Q: If I'm hearing you correctly, Mark, this is a time for investors to be nimble in trading in and out, or otherwise stay on the sidelines until we see better times.


I think that's exactly correct. As I said before, this is no time to be a buy-and-hold investor. It's a trading-market environment. Right now, the trading money is made on the short side. The market is completely opposite of what it was doing in the late 1990s and early 2000. Basically, many of the technology and telecom charts are in terrific trends as they were back then. The trends just happen to be bearish right now.

And from a trading perspective, when a stock is in a definable trend or a market is in a definable trend, it's very easy to trade as long as you stay with that trend.

Edited by Jack Dierdorff

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