A Bullish Breeze on the Street

S&P thinks the boost in market sentiment may actually make it tougher for stocks to push higher

By Mark Arbeter

The major indexes put in a mixed performance last week. The S&P 500 moved to a new recovery high, the Nasdaq saw some light profit taking while the Dow Jones industrial average moved back up towards 11,000. Bond yields fell slightly and crude oil finished back below $60 per barrel after some mid-week strength. Market sentiment is very bullish on many counts, so in the near term, a further push higher may be tough in our view.

The S&P 500 broke above the previous closing high of 1268.25 on Wednesday, Dec. 14, and is at its highest point since June, 2001. The index is closing in on very important trendline resistance in the 1282 area. This trendline is drawn off the highs over the past two years and therefore is somewhat significant in our opinion. This trendline capped prices a couple times in 2004 as well as a couple times in 2005. The more a trendline is tested as either support or resistance, the more significant it becomes. If the S&P 500 can bust through this trendline, the next piece of chart resistance is at 1316, or the high from back in May 2001.

Underneath current prices, there are plenty of support levels evident for the S&P 500. Immediate support comes from a trendline off the recent lows that lies at 1268. There is also chart support at that level. The bottom of the recent trading range sits at 1250. The 20-day exponential moving average is at 1256 and the 50-day exponential moving average comes in at 1239. Further chart support lies between 1240 and 1245, from the peaks in August and September.

Market sentiment, which from our perspective, is based on investor emotion, runs from depression to euphoria and back again. Right now, sentiment is approaching euphoria following the latest rally and hope that the Federal Reserve will soon be finished with its tightening cycle. Unfortunately, when market sentiment is tilted heavily towards the bullish side, oftentimes intermediate-term stock market returns tend to be disappointing. We believe there are only two ways to alleviate this sentiment dilemma. The first is a decent sized correction and the second is an intermediate-term pause in the market. Neither is a reason to get too excited about the market as we move into 2006.

Starting with the investment surveys, Investor's Intelligence poll of newsletter writers is presently showing 58.8% bulls and only 21.6% bears. This is the highest level of bullish sentiment and the lowest level of bearish sentiment since August, 2005. From the beginning of August, the market corrected over the next 2-1/2 months. Bullish sentiment rarely gets to or above 60% and bearish sentiment rarely moves below 20%.

The shorter-term Consensus and MarketVane polls are also showing high levels of bullish sentiment. The Consensus poll is a whopping 76% bullish, equaling the level seen in late November 2004. Prior to that, it is the highest reading since January, 2004. The three-week average of the Consensus poll is 73.3%, also the highest since January, 2004. The MarketVane poll has risen to 70% bulls, a level seen a couple of times over the past couple of years but one that is rarely exceeded. The combination of the Consensus and MarketVane polls is 144%, equaling the highs from November and January 2004. The high prior to that was way back in March 1998 when the polls combined for 149% bulls.

The options market is also exhibiting a fair amount of good cheer towards stocks of late, as call volumes have been heavy relative to put volumes. The CBOE equity-only put/call ratio fell to an extremely low level of 0.42 on Thursday, Dec. 15. This ratio has only fallen below 0.40 twice since the beginning of 2003 with both times occurring in December of that year, just prior to the 8-month market pullback in 2004. The 5-day, 10-day, and 30-day equity-only put/call ratios are all approaching the recent lows from back in July, just prior to the market's peak in early August.

The CBOE total put/call ratio fell to an abnormally low reading of 0.41 on Thursday, the lowest level in over five years. The 5-day CBOE put/call ratio fell to 0.64 yesterday, the lowest since January 2004. The 10-day P/C ratio is down to 0.71, the lowest since November 2004.

Another options ratio that is signaling potential trouble comes from the International Securities Exchange (ISE). The ISE Sentiment Index (ISEE) only measures opening long customer transactions on ISE. Transactions made by market makers and firms are not included in ISEE because they are not considered representative of market sentiment due to the often-specialized nature of those transactions. Customer transactions, meanwhile, are often thought to best represent market sentiment because customers, which include individual investors, often buy call and put options to express their sentiment toward a particular stock.

Since this data only starts in October, 2002, we do not have a great history on it, although many times it works well in calling intermediate-term tops and bottoms. High daily readings above 270 have been pretty good at calling tops while low daily readings below 110 have been good at predicting market lows. Of late, there have been multiple readings above 200, which often times have signaled at least a short-term top. In addition, the 21-day exponential moving average of the ISEE has risen to 193, the highest since December, 2004.

Yields on the 10-year Treasury note fell slightly this week, benefiting in some part to the language change by the Federal Reserve. The 10-year dropped to 4.45% and is closing in on important chart resistance at the 4.4% level. This level was the low yield from late November. The 100-day exponential moving average also lies near 4.4%. Daily momentum has rolled over however the weeklies have yet to confirm, but are close. A break below 4.4% could then set the market up for a move to 4.25%.

While we had expected rates to continue higher, they have traced out a lower high in yields and are close to making a lower low for this move. We would also point out that the 10-year Treasury is dictated on a daily basis by the market and not by the Federal Reserve. Just because there is a perception that the Fed is near the end of its tightening cycle does not necessarily mean that long rates can't move higher.


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A+ Highest B Lower
A High C Lowest
A- Above Average D In Reorganization
B+ Average NR Not Ranked
B- Below Average

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Required Disclosures

In the U.S.

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 28.7% of issuers with buy recommendations, 60.3% with hold recommendations and 11.0% with sell recommendations.

In Europe

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.8% of issuers with buy recommendations, 44.8% with hold recommendations and 20.4% with sell recommendations.

In Asia

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 28.1% of issuers with buy recommendations, 51.1% with hold recommendations and 20.8% with sell recommendations.


As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 29.3% of issuers with buy recommendations, 57.7% with hold recommendations and 13.0% 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.

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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

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