The Shift Is On

The market is undergoing a rotational consolidation -- where investors redeploy profits into sectors with less-lofty valuations

By Mark Arbeter

The S&P 500 ran up to a new intraday recovery high on Friday, Mar. 5, but was unable to hold that level into the close, as the market did not know what to make of another weaker than expected payroll report. The Nasdaq continues to underperform the blue chip indexes as technology stocks have failed to gain any traction of late.

Overall, the stock market is going through a rotational consolidation within the confines of a bull market and this should allow all the major indexes to move to recovery highs before the year is out.

Rotational forces that are currently leaving their footprints all over many market sectors are a classic bull market characteristic. Institutions are in the process of taking profits in the many issues that have soared off the bear market lows and are putting these funds back into stocks that offer more value and may have been neglected.

While money has come out of technology, it has found a home in biotechnology as well as oil, retail, financial and the more conservative consumer staple stocks. As long as institutions continue to find a place for their funds, the market is likely to see shallow pullbacks and should eventually be able to march higher.

The Nasdaq remains the most susceptible to further downside over the intermediate term, having traced out a series of lower highs and lower lows. Weekly stochastic and moving average convergence/divergence (MACD) indicators are also in negative configurations. The index has rallied back to its 20-day and 50-day exponential moving averages but has been unable to punch through these important near-and intermediate-term averages.

Market internals for the Nasdaq also remain neutral to bearish. There have been some positives with respect to the daily charts that may signal that some near-term strength is possible. After moving to oversold levels, daily stochastic and MACD indicators have given off positive divergences, tracing out higher lows as the index went to lower lows.

For more damage to occur on the Nasdaq, the 1,990 to 2,000 area will have to be taken out. If this were to happen, it opens up downside risk to the 1,800 to 1,870 area. This is where good chart support comes in as well as longer-term moving averages. A move to the low 1,800s would also represent a key 38.2% retracement of the advance since March, 2003. Weighing on the potential upside is trendline resistance at 2,060 and chart resistance from the recent high at 2,090.

The S&P 500 pushed back up to near recovery highs and as we have been saying, may extend its recent range to the upside. However, we do not see a major move at this time because weekly technical indicators such as relative strength (RSI), MACD, and stochastics remain very overbought and they probably need to correct this situation before another leg in the advance can take place. A break to the upside would probably run into resistance near the 1177 level. This was the top for the S&P 500 back in 2001 and 2002. An additional piece of resistance comes from a trendline drawn off the peaks in January, 2003, June, 2003, and January, 2004, and that comes in at 1,188. Just below, the 50-day exponential moving average comes in at 1,129 and the recent low or chart support lies at 1,126.

The bond market broke out of its tight range with a vengeance on Friday with the yield on the 10-year Treasury note falling to its lowest level since July 15, 2003. The 10-year Treasury yield broke through the recent low yield of 3.91%, which was substantial resistance because the 10-year was turned back at that yield level for three consecutive times. The 10-yield failed at that level in September, 2003, January, 2004, and early March, 2004. The Treasury note had been trading in an ever-narrowing range since August, 2003. A 61.8% retracement of the dramatic rise in rates from June, 2003, to August, 2003, lies near 3.7%, with pretty good chart resistance at 3.55%.

The U.S. dollar index, after breaking out of a small double bottom formation on Tuesday, Mar. 2, fell back and tested the breakout point of 87.80 on Friday -- and held. This pattern is quite typical and has near-term bullish implications. However, there is major, long-term resistance in the 91 to 92 area and this zone is likely to be a problem for the dollar. The dollar remains in a long-term bear market and until a major reversal formation is traced out and long-term, downward sloping trendlines are taken out, short-term rallies are likely to be limited in scope.

Arbeter, a chartered market technician, is chief technical analyst for Standard & Poor's

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