Stocks Rise Despite Oil's Surge

We still do not see a major upside move developing over the intermediate term

By Mark Arbeter

The blue chip indexes broke out of their recent ranges, and got very close to hitting new highs for the year, before running into some intraday profit taking on Friday. Once again, the Nasdaq ran into a brick wall right at 2100, before pulling back. While our call for a pullback in the major indexes has only led to a pause, we still do not see a major upside move developing over the intermediate term.

On Friday morning, the S&P 500 rallied to its highest level since Mar. 8, posting an intraday high of 1219.55. This is very close to the high for the year that occurred on Mar. 7 when the S&P 500 closed at 1225.31 and posted an intraday high of 1229.11.

The Dow Jones Industrials hit an intraday high of 10656.29 Friday, the highest level since Mar. 21. On Mar. 4, the Dow closed at 10,940.5, the high for the year, while on the following trade day, the index posted its intraday high for the year at 11,027.2.

While the big-cap indexes struggle to get back to their cyclical, bull market highs, other indexes continue to shine. The S&P MidCap 400 broke out to an all-time high last week, taking out its previous high from back in March. The Dow Jones Utility Index posted a new recovery high, and is at its highest level since June 2001. The Utility Index is up about 124% since bottoming out in October 2002.

Considering what crude oil prices did last week, the stock market certainly put in a pretty decent performance, in our opinion. Crude oil prices rose about $5 a barrel, or over 9% on the week, finishing at an all-time high of $58.47. Going back to the recent low at $46.80 on May 20, crude has surged 25%. Yet, since that time, all the major stock indexes are higher.

Crude oil has minor trendline resistance up at $60, and this trendline is drawn off the peaks in October 2004 and April 2005. Major or long-term trendline resistance, drawn off the peaks in February 2003 and October 2004, comes in at $66. Weekly and monthly momentum indicators are in bullish configurations and are not yet overbought, giving crude prices room on the upside, in our view.

Over the near term, we believe the S&P 500 will challenge its recovery high up at 1225. A break of that level would then target the 1253 area, which represents a 61.8% retracement of the bear market. Another Fibonacci target, based on the width of the latest consolidation, would target the 1280 zone. There is also chart resistance up in this area from way back in 2001. Immediate chart support lies in the 1190 to 1205 range, with short-term trendline support at 1195.

The Nasdaq was turned away at the 2100 level for the sixth time this year, and until this barrier is taken out, it is not likely that the rest of the market will get much traction to the upside, in our view. Immediate chart support lies down at 2050, with a plethora of intermediate- to long-term moving averages in the 2017 to 2032 range. Both the Nasdaq and the S&P 500 have worked off their short-term, overbought conditions, so we believe they do have some room to head higher.

Market sentiment has gotten much more euphoric of late, after getting fairly bearish in April and May. The 10-day CBOE put/call ratio recently fell to 0.85 after peaking at 1.06 on April 15. The recent low for this ratio was 0.79 in February, about a month before the market topped out in March. The 30-day equity-only put/call ratio has dropped to 0.60 from 0.70 back in May. The latest trough in the 30-day was at 0.56 in December, just before the market top at the end of 2004. Another indication that sentiment has moved quickly to the bullish camp is the rapid change in odd-lot short sales. On Apr. 15, odd-lot short sales peaked out at 3.8 million shares. By June 13, short sales had fallen all the way to 1.2 million shares.

The investment surveys have also seen a change to the bullish side of the fence. Investor's Intelligence is currently showing 52.7% bulls and only 20.4% bears. This is in contrast to 43.5% bulls and 30.4% bears at the beginning of May. The Consensus poll is currently at 67% bulls, vs. only 30% back in April. The AAII poll has gone from 16.5% bulls in April to almost 50% bulls.

While this conversion from bearish sentiment to bullish sentiment is positive for the market, and adds fuel to the advance, we are concerned that these sentiment figures are nearing extreme levels sometimes found at short- to intermediate-term market tops.

The bond market was basically flat last week, with the 10-year Treasury yield rising 3 basis points to 4.08%. The 10-year yield went as high as 4.19% on an intraday basis, before gaining support from its 100-day exponential moving average. Back in early May, the 10-year also found support at the 100-day. From the intraday low back on June 3 to intraday high last week, yields had increased about 40 basis points. With the recent reversal down at strong resistance in the 3.9% area, in combination with a market that is overbought on both a daily and weekly basis, and with market sentiment at its most bullish level in two years, we see yields backing up to the 4.3% to 4.5% area.

Taking a step back, the 10-year Treasury has basically been confined to the 3.9% to 4.7% range since July 2003. A sustained period of rangebound trading for bonds is quite rare, although we would not consider two years a sustained period. Basically, yields rose in a fairly volatile fashion from 1946 until 1981. Since 1981, yields have fallen in a fairly volatile fashion.

While we believe a long-term trough for 10-year yields was put in back in June 2003, down near 3%, we do not yet have a feel for when we will see a major reversal back to the upside for yields.

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

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