Still Sounding the Depths

The S&P 500 and Nasdaq remain in intermediate-term downtrends and have yet to find a bottom

By Mark Arbeter

The major indexes continue to trace out different looking chart patterns despite rallying about the same off the recent lows posted in mid-August. As of Thursday, Sept. 2, the S&P 500 had rallied 5.2% off the August lows and back into a zone of sideways trading that has essentially lasted since the beginning of this year. On the flip side, the Nasdaq continues to be in the worst shape technically, and despite its 6.9% jump from the recent lows, the index is still trading below the prior important low set in May.

The one thing that both indexes definitely have in common is that they remain in intermediate-term downtrends, unable to break out of the pattern of lower highs and lower lows that has been in force since January. It is interesting to note that the Nasdaq has underperformed the S&P 500 since the middle of January, and will have to turn the tables on the blue chips before we see any kind of large move to the upside.

To demonstrate another difference between the action of the blue chip indexes and the Nasdaq, one needs to look no further than the recent market breadth statistics. The NYSE advance/decline line has been rising since late 2000 and is in all-time high territory. Of course, this statistic is a bit distorted because the number of issues on the NYSE typically rises over the years, and the make-up of the NYSE is heavy with interest sensitive issues that are not common stocks. This latest point has really helped the A/D line recently with the strong rally in bonds since mid-June.

The Nasdaq's breadth was in a long decline before bottoming out in March, 2003. The A/D line then rose until peaking out in January, just when the index peaked. Since January, the Nasdaq's breadth has been steadily deteriorating, having given up most of its gains since March, 2003.

The S&P 500 has moved into an area of heavy chart resistance that runs from 1,090 all the way up to the top of the trading range at 1,160. The index has been able to recapture its 50-day and 150-day exponential moving averages and from a very short-term basis, broke out above chart resistance at 1,108 on Thursday, Sept. 2. Where this rally runs out of gas is difficult to say but we think that the "500" is approaching the upper end of this move.

The rally that started in March lasted 8 days and covered 59.24 S&P points. The advance off the May low to the first peak took 15 days and gained 58.08 points. The latest rally, as of Thursday, has been 15 days and pushed the "500" a total of 55.08 points. A potential target for this move was slightly exceed on Thursday. A 61.8% retracement of the decline since June comes out to 1113, very close to where the "500" finished on Friday.

The Nasdaq also broke Thursday from a very small base and ran smack into its 50-day exponential moving average. On Friday, the index gave back all of Thursday's gains and has shown little evidence that it is even attempting to bottom out. As we have said, the Nasdaq continues to trade below 1,900 or the downside breakout point from late July. This area represents key chart resistance and it will be important for the Nasdaq to retake this level. The index has been able to retrace only about 38.2% of its decline from the June peak and remains below key trendline resistance and important intermediate-term and long-term moving averages. Many technical indicators, based on price as well as breadth and volume, continue to match the indexes price performance, confirming its weakness.

A look at some of the key technology stocks within the Nasdaq gives us little hope of an imminent turnaround. Intel (INTC ) and the Philadelphia Semiconductor Index (SOX.X ) broke down further on Friday and posted 52-week lows. Cisco (CSCO ) and many other technology names remain in well-defined downtrends, not far from new yearly lows. Some of the best performers of late come from sectors like steel, oil, gold, and chemicals -- not groups that are likely to lead the next bull market.

The bond market may have bottomed out last week, after the yield on the benchmark 10-year Treasury note rallied from up near 4.9% in May and June, down to near 4%. The move retraced 61.8% of the rise in yields from March until May. The bond market is very overbought and exceeded our downside targets. There is major chart resistance for the 10-year note from 3.9% to 4.4%. A move back above 4.4% would probably confirm a turn in yields.

The stock market's decline since January has moved some market sentiment data into fairly oversold territory. The Consensus Poll, which measures the percentage of bulls on stock index futures, dropped to only 27% bulls recently, the lowest since the market bottom in March, 2003. This compares to a bullish sentiment reading of 81% back in January as the market was peaking. The Investors Intelligence poll of newsletter writers has seen a nice pullback in bullish sentiment of late. A week ago, bullish sentiment fell to 39.6%. This compares to a reading of 39.8% back in March, 2003. Bearish sentiment from a week ago rose to 30.2%, the highest since last April.

The deterioration in sentiment along with the washout in many stocks should allow the market to finally bottom out sometime during the September/October timeframe. We continue to see some kind of test by the major indexes during the fall months.

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

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