Mixed Signals for Stocks

While key technical indicators look good, sentiment measures remain overly bullish

By Mark Arbeter

The market cracked a little last week but did not break, and stocks could be in for another run up near the top of the 10-month trading range. However, sentiment numbers are obscenely bullish and that should keep a lid on things for the intermediate term.

Due to the recent downdraft, the S&P 500 broke its daily uptrend support line but was able to hold above the same line on a weekly basis. While it is too early to suggest that the entire advance is over, it will be important for the market to regroup in the near-term and bust back above the latest high up at 947. A price failure up near this level with a break of the recent intraday low at 912 would then be a setup for further corrective action.

The first decent area of chart support lies just beneath the 900 area. The 50-day exponential moving average lies just above the 900 zone and is also considered a support point. On the upside, besides the recent high at 946, there is chart resistance up at 954, which was the intraday high on Dec. 2. The two key points of resistance continue to be 960, from the near market trendline drawn off the peaks over the last couple of years, and the 963 level, or the high close in August, 2002, and near the closing low in September, 2001.

So far, volume levels on down days have been below average and that is a positive. There has been some minor deterioration in my accumulation/distribution models but nothing serious. Some of the leading stocks and indexes pulled back to near their breakout points and it looks like many of them are holding, if not rebounding, providing positive-looking chart formations. For instance, the AMEX Biotech index recently broke out from a 10-month trading range when the index closed above the 400 level. The index then pulled back just below the 400 zone (support), and subsequently resumed its upward path with a vengeance.

A longer-term way to measure accumulation/distribution patterns is to look at the 50-day exponential moving average of the NYSE up/down volume. This gauge of demand for stocks recently hit 2.27 or the highest level since February, 1991. This one measure has a good record of anticipating new bull markets. When we look at this moving average over the last 30 years, it has repeatedly climbed to at least the 2.2 level right at the beginning of every bull market. It rose to this level in January, 1975, August, 1982, October, 1987, and February, 1991. Of course, the 50-day up/down volume has risen above 2.2 on more than just these occasions; however, we just mentioned those that occurred right after major bear markets.

Our primary concern about the latest advance, sentiment, has gotten even more overbought. Both the Investor's Intelligence and the American Association of Individual Investors polls are at bullish extremes. The II poll is showing 56% bulls, the highest percentage of bulls since February, 2001, and only 20.9% bears, the fewest since February, 1992. The AAII poll is even more bullish, with 62.8% bulls and 16.3% bears. Either this is the beginning of the next bull market and everyone knows about it, or at best the market has a ceiling on top of it, and at worst, a big correction is not too far off.

Another sentiment measure that is very overbought is the volatility indexes. The VIX or volatility on the S&P 100 has fallen to near the 20 level, the lowest since May, 2002, and that was right before a major correction. The VXN or volatility on the Nasdaq, is at its lowest level since August, 1998, which was also right before a major drop in the market.

Overall, there are some very bullish readings coming from the market and some very bearish readings that are also being seen, so our crystal ball has become quite cloudy. In these cases, it is always best to wait until one side takes the upper hand. If the S&P 500 can forcefully take out the 960 to 965 area, the bull should be able to start charging.

Arbeter is chief technical analyst for Standard & Poor's

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