By Mark Arbeter
The major indexes failed to take out the recent highs last week, as the latest rally lacked strong overall volume once again. The S&P 500, Nasdaq, and the Dow Jones industrial average all failed to reach levels that were achieved at the end of November and early December and have now traced out lower highs on the daily charts.
While it is a bit early to suggest the markets are headed back down to the levels seen in July and October, it certainly appears that the major indexes are at least headed back down for another critical test of the lower end of the trading range.
The sloppy action of late is indicative of a market that lacks real conviction. It appears that the bulls and bears have come to an intermediate-term standstill. The latest rally was due to a lack of selling, and not a big surge in demand. When the market tested the bottom of its trading range in late December, it was due to a lack of buying demand, not a substantial increase in selling pressure.
As the market oscillates within the current trading range, an increase in volume as we approach the outer boundaries of the range should be very telling and would indicate that the present trading range environment is over.
Key chart support for the S&P 500 is in the 870 to 876 area, while a 50% retracement of the October to late November rally lies at 860. Chart support for the Nasdaq comes in at 1319, and a 50% pullback of the latest rally lies at 1315. If these levels are taken out on a closing basis that is accompanied by an increase in volume, the "500" could fall to near the lows posted in July and October of between 770 and 840. The Nasdaq is likely to decline to the 1200 to 1300 range or the lows seen in July.
The price trends in other markets continue to paint a very poor outlook for stocks. Gold prices surged to a six-year high last week while oil prices rose to a two-year high. The dollar fell further against other major currencies and is now at a three-year low. Treasury yields fell back, and the 10-year is once again approaching the 4% level.
The action of these markets suggests an investment environment of fear about the economy, concern about war, and a lack of confidence by foreigners towards U.S. stocks. It does not appear to us that the massive sea change that has been taking place over the last couple of years -- away from U.S. financial assets and back towards hard assets -- has fully sunk in to the investing public yet. It looks like it could take years for these trends to play out.
With all the negative news, bullish sentiment as measured by the Investors Intelligence poll rose again while CBOE put/call ratios have dropped to potentially dangerous levels. The latest readings from the poll show an increase in bullish sentiment to 50% and a decrease in bearish sentiment to 27.2%. These are not comforting numbers during this kind of market environment and suggest more pain may be needed before a long lasting bottom has been seen.
The 30-day CBOE put/call ratio fell to 0.76 during this past week, very close to the levels posted in March and August of last year, and right as the intermediate-term trend was peaking.
While the market remains in a sideways consolidation and we have not seen enough of an increase in institutional selling to suggest that another major breakdown is imminent, we would remain comfortably on the sidelines.
Arbeter is chief market analyst for Standard & Poor's