Stocks Reach a Milestone

Finally, the S&P 500 index has reached a new recovery high -- but the advance hasn't been supported by strong trading volume

By Mark Arbeter

Despite another surge in crude oil prices last week, the S&P 500 and the Dow Jones industrial average finally moved out of their respective trading ranges, posting new recovery highs on the back of the favorable February nonfarm payroll report. While the price action was a positive in our view, the move was less than robust and the Nasdaq remains deep within its base. We are also concerned about the makeup of the recent strength, with energy, material, and other cyclically based stocks leading the blue chip indexes higher.

A real breakout for the blue chip indexes, in our opinion, equates to a strong price move of at least 1% above the breakout point. We believe it must also be accompanied by strong volume and high ratios of advancing volume versus declining volume, and strong breadth figures. With the previous high close on the S&P 500 at 1,213.55, a close of 1% above this equates to 1,226. We use the 1% rule to lessen the chance of getting whipsawed. The DJIA previous closing high was 10,854.54 and 1% above that is 10,963.

If the S&P 500 can put in a true breakout, then we believe our long-standing target of 1,253 comes into focus. This target was derived from two different types of technical analysis. The first was simply adding the width of the consolidation from last year to the breakout point. The second represents the next Fibonacci retracement of 61.8% of the bear market losses. Chart resistance, from back in 1999, 2000, and 2001 also becomes thick in the 1250 zone, and runs clear up to the all-time highs. Another Fibonacci target of 261.8% of the width of the consolidation from 2004 may also come into play. Multiplying the width of the consolidation, which was 94.53 points, by 2.618, gives us 247.48 points. Adding this to the bottom of 2004's base of 1,063.23 gives us another Fibo target of 1,311.

As we have been saying for some time, support for the S&P 500 is plentiful. The 50-day, 80-day, and 150-day exponential moving averages come in at 1,193, 1,184, and 1,165, respectively. Near-term chart support, from the low in February, lies at 1,184. More important chart support comes in at 1,164, or the low from January. This was close to the top of the consolidation in 2004, which was in the 1,160 area. Trendline support, drawn off the major lows in March, 2003, and August, 2004, is at 1,175. Another shorter-term trendline, hitting the lows in August, 2004, and October, 2004, comes in at 1,155.

One of our consistent concerns of late has been the composition of the sectors that have led the market. Clearly, energy has been a top performer over the last month and over the last year. This performance has pushed Exxon Mobil (XOM ) to the largest market cap in the S&P 500. The Energy Sector SPDR (XLE ) has soared over 50% during the last 12 months and is up almost 15% over just the last month. While this strength in energy stocks has pushed the blue chip indexes higher, the reason for the strength has been the surge in crude oil prices, and no matter how you slice it, high crude prices over a long-term period have not been good for the stock market, corporate profits, economic growth or household finances.

Other segments that are doing well include natural resource stocks and materials stocks. As with energy, these stocks are sensitive to some underlying commodity factors and therefore, we think, are outperforming due to higher commodity prices. We would prefer to see leadership come from growth stocks, whether it is technology, health care, or consumer staples. Historically, sustainable bull markets have been led by growth stocks and not led by potentially inflationary areas.

The Nasdaq continues to trade between the 2,000 and 2,100 area and remains deep within its two-month base. The index is also caught between its 50-day simple moving average at 2,084 and its 200-day exponential moving average at 2,011. The first upside hurdle for the Nasdaq is at 2,100. A break above this level would finally break the string of lower lows and lower highs, and we think would set the index up for a run at its recovery highs up near the 2,200 level. Along with chart support at 2,000, there is also an important trendline, drawn off the March, 2003, and August, 2004, lows that comes in at 2,000. As we have said, the Nasdaq continues to be weighed down by large cap technology stocks. The four largest stocks on the Nasdaq -- Microsoft (MSFT ), Intel (INTC ), Cisco Systems (CSCO ), and Dell (DELL ) -- make-up a whopping 17% of the index, and three of these stocks appear to be in major, long-term bases.

Although we have complained about the make-up of the rally, there are secondary indexes that continue to act very well from a technical basis. The S&P Small Cap 600 index, S&P Mid Cap 400 index and the Dow Jones transportation index have all broken to new all-time highs. The death of the smaller stocks, as so many have predicted, has certainly not occurred yet, and in fact, these stocks are flourishing. This underlying strength in secondary indexes can be seen in the continued strength in the NYSE advance/decline line. The broad advance in smaller stocks has pushed the NYSE A/D line to another new high. It is when the rally becomes selective that technicians really start to worry. Obviously, this has not occurred yet.

Crude oil prices surged to their highest levels since October, exceeding the $55 level for a brief time last week. Crude has pulled back a bit, and this is a natural occurrence. Many times, after a stock or commodity makes a new high and then corrects, all within the confines of an intermediate- to long-term uptrend, the financial instrument will rally right up to its previous high and then pullback. Once this pullback is complete, we think new highs are a good possibility. We believe crude will break out and see prices headed for the $60 to $65 level.

Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.


This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

Readers should note that opinions derived from technical analysis may differ from those of our fundamental recommendations.

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

Before it's here, it's on the Bloomberg Terminal.