The Nasdaq's Sticking Point
By Mark Arbeter
Last week was certainly a fascinating time for the markets, with bond yields plunging and then reversing sharply to the upside on Friday despite a weak payrolls report. In addition, crude oil prices rose sharply while the U.S. dollar added to its recent gains.
So where does that leave stocks? Although the major indexes have been in a fairly strong rally, the advance or price momentum is slowing. We attribute this decelerating momentum to a couple of technical factors. The S&P 500 and the Nasdaq have both run into areas of important chart resistance and we continue to believe that the indexes will have to pull back before they can bust through these key levels and take a run at the cyclical, bull market peaks. The indexes are also very overbought on a daily or short-term basis from both a price and internal perspective. Moreover, volume during the rally has been less than robust, and therefore, we think that the market will need a pause or pullback to recharge its batteries.
Currently, the most interesting index to analyze from our perspective is the Nasdaq. The Nasdaq had advanced (as of Thursday, June 2) 193.62 points, or 10.2% since the bottom on Apr. 28. This is the strongest 24-day period for the Nasdaq since last November. What has caught our attention is the apparent failure at the 2,100 area once again. Not only did this zone provide a ceiling for the index in January, February, and March of this year, but it also led to a pause in the rally in mid-November of last year. Looking further back on the charts, the 2,100 area was also a ceiling for the Nasdaq during its countertrend, bear market rally into the January, 2002 high.
Why the 2,100 level? We believe one reason is that there was a lot of accumulation in this area early in 2004 as well as in late 2004. The institutions and individual investors that acquired stocks in this area were for the most part off in their timing. As the market rallies back near 2,100, these holders of stocks, having sat through some tough times, are probably more than willing to dump their holdings now that they have broken even. This supply, in our opinion, has created at least a temporary ceiling for the Nasdaq.
There were three separate weeks over the not-to-distant past when there was evidence of fairly heavy accumulation in and around 2,100. The most recent was the week ending December 3, 2004, when trading volume on the Nasdaq was 11 billion shares and the index ranged in price between 2,090 and 2,164. Moving back to the beginning of 2004, there were two consecutive weeks of heavy accumulation. During the week of Jan. 9, 12 billion shares traded hands during a strong week that ranged between 2,021 and 2,113. The following week saw 11.7 billion shares trade between 2,080 and 2,140. To add significance to this analysis, the two weeks in early 2004 represented the two highest trading periods for the entire year of 2004. The other that occurred in December, 2004, was the sixth highest week of volume in 2004.
Because these weeks were strong from a price perspective, we surmise that a lot of the volume was due to accumulation by institutions and individual investors. Because their timing was not great, we can project that anyone left holding stocks that were acquired during these periods is probably more than happy to sell into rallies every time the Nasdaq approaches the 2100 level. By the way, the intraday high on Wednesday of last week was 2,095.54 and the intra-day peak on Thursday was 2,097.80.
One of our main concerns about the current rally is the lack of robust volume levels as well as the lack of strong up/down volume figures. The characteristics we look for to gauge whether a rally can build into a sustainable uptrend are a price thrust accompanied by strong absolute volume levels, and robust levels of advancing volume relative to declining volume. So far, we have seen a strong price performance, but we think that volume continues to suggest that the rally will not turn into a sustainable trend to the upside.
To measure the strength of the move from a volume standpoint, we like to look at the 10-day ratio of up/down volume on the Nasdaq. The most recent comparison takes us back to the rally off the August, 2004, lows. During the initial stages of that advance, the 10-day ratio of up/down volume on the Nasdaq hit 2.9, a fairly healthy ratio. The latest advance off the May lows has only pushed this ratio to 2.3. The rally off the October, 2002, bear market low pushed this ratio to an extremely high level of 4.1, while the rally off the March, 2003, low moved this ratio to a very strong reading of 3.7. Clearly, the volume thrust we would like to see is not there, and suggests to us that this is a rally in an aging bull market.
The 10-year Treasury yield plunged below 4% last week, dropping as low as 3.8% during the early part of Friday's session. The reversal on Friday from 3.8% to 3.98% was significant and we think could represent a turning point for yields. As we have mentioned many times, there is quite a bit of chart support in the 3.9% area. This zone acted as support in 2002, 2003, 2004, and 2005. Combine this support zone with the very overbought condition, and you have the ingredients for a major reversal in yields. The 14-day relative strength index, or RSI, is at its most overbought condition since June 2003, right when yields bottomed out. If bond yields do turn around, initial chart resistance lies up in the 4.25% area.
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
|A-||Above Average||D||In Reorganization|
S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.
S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.
Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.
In the U.S.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
For All Regions:
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst 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, NY, NY.
Other Disclosures This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").
The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.
Disclaimers This material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. 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.
For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.
Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations.
Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's