Will Stocks Wake Up with September Over?

The market can now head into the last quarter with a little wind at its back

By Mark Arbeter

Up until Thursday of last week, watching the stock market was about as exciting as watching paint dry. As we finally got to the end of September, we guess that investors breathed a sigh of relief that there was no damage in the seasonally weak month. The market can now head into the last quarter, one that has historically been the strongest, with a little wind at its back.

After the S&P 500's mini-pullback during the middle of September, which took the index down to multiple pieces of support in the 1200 to 1205 area, the "500" bounced nicely this week and recaptured its 10-day, 20-day, and 50-day exponential moving averages. Now it is up to the market and the bulls to prove themselves.

Key short-term chart resistance lies at 1230 to 1245, which was the cyclical bull market high. Trendline resistance, drawn off the peaks in early August and early September, comes in at 1241. Above there, the 61.8% retracement of the bear market sits at 1253. In addition, longer-term trendline resistance, from the peaks in December, 2004, March, 2005, and August, 2005, lies at 1260.

On the downside, chart support as well as trendline support is in the 1200 to 1205 zone. The 150-day exponential moving average comes in at 1205 and the 200-day exponential moving average is at 1196. Longer-term trendline support, drawn off the lows in August 2005 and April 2005, sits at 1195. In a sense, the S&P 500, with all this overhead resistance, along with a plethora of support below, seems to be boxed in, unable to breakout strongly either way. Eventually, either the bulls or the bears will take charge. Stay tuned.

The Nasdaq has bounced off important, intermediate-term chart support at 2100, but like the S&P 500, faces a myriad of hurdles overhead, in our opinion. Chart resistance runs from 2150 to 2220 or the previous cyclical bull market peak. Trendline resistance, drawn off the most recent lows in July and August, lies at 2150. This trendline was formerly support, but since it was taken out, it now represents resistance. Trendline resistance off the peaks in August and September lies at 2170. Long-term trendline resistance, off the peaks in January, 2004, December, 2004, and August, 2005 is at 2228. Like the S&P 500, the Nasdaq has retaken its 20-day and 50-day exponential moving averages.

One interesting observation that can be made about the stock market of late is that it frequently reverses around the end of the month. Unfortunately, we do not have a reason for this price action. The string of these end-of-month reversals since late 2004 is quite remarkable. The S&P 500 peaked at the end of December, 2004, the index bottomed and reversed near the end of January, 2005, followed by short-term bottoms at the end of February, March, April, and June. The index then peaked right at the end of July, bottomed at the end of August, and was trying to bottom once again very close to the end of September.

As a student of the market, we believe that certain cycles have a big influence over the performance and direction of the stock market. For instance, we have talked many times about the powerful four-year cycle in stocks. Major or minor stock market lows have occurred in 1970, 1974, 1978, 1982, 1987 (off a year), 1990, 1994, 1998, and 2002. Unfortunately, the next 4-year low is scheduled for 2006. These lows have a tendency to occur in the last 4 months of the year. The 78-week cycle is another one we pay very close attention to, as it has been fairly accurate of late. The last low for this cycle occurred right around the August, 2004, bottom. Previous 78-week cycle lows occurred in March, 2003, September, 2001, and September, 1998. As with the 4-year cycle, the next scheduled 78-week low is scheduled for the February/March period of next year.

Another cycle, that has a lot to do with the accuracy of the 4-year cycle in our view, is the Presidential election cycle. Historically, bear markets have occurred in the first half of this cycle, while bull markets tend to occur in the 2nd half of this cycle. By far, the best part of the Presidential cycle on an historical basis is the 3rd year or pre-election year. Since 1929, the S&P 500 has advanced an impressive 14.7% during the pre-election year. The second best year in this cycle is the election year or year 4. The worst two years are year 1 or the post-election year and year 2 or the mid-term year. Depending on how far back you measure, both these years tend to underperform year 3 and year 4 by a wide margin. Since we are moving into 2006 or the mid-term year (year-2), we would not expect robust returns based on the history of this cycle. Since 1929, the 2nd year of a Presidential cycle has averaged only a 3.5% return for the S&P 500. Since 1945, the performance is a little better at 4.3%.

Crude oil prices, which have drifted sideways for the entire month of September, rose from $64.19 per barrel to $66.15. So far, during the latest pullback, crude has held chart support in the $62.50 area. Support has also been provided by the 55-day exponential moving average. We believe crude prices are at an important juncture for a couple of reasons. First, it is possible that crude oil is working on a small, double bottom reversal pattern. To complete this pattern, crude would have to close above $68.00. We could then project a measured move up to the $73.50 area.

Looking at open interest in the options market, sentiment has moved to its most bearish position since May, which was the last major low for crude oil. We consider this bullish from a contrarian perspective. On the negative side, the weekly MACD and RSI indicators are still very overbought, suggesting the possibility that we need more of a correction to alleviate this condition.

The 10-year Treasury bond yield rose to 4.33% on Friday, Sept. 30, taking out the most recent high of 4.29% on Sept. 26. Yields on the 10-year Treasury are now at their highest levels since the middle of August. The 10-year yield rose right to important trendline support drawn off the yield highs in March and August, 2005. If yields break above this trendline support, the next area of support is the 4.4% zone or the yield high in August. Above here, there is trendline support at 4.5% and additional chart support at 4.6%.

A negative for bonds, in our view, is that the weekly MACD has crossed back above the zero line for the first time since the beginning of March. Additionally, sentiment remains bullish on the investment polls.


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

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