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Get Four
|  | DECEMBER 13, 2004
 TECHNICAL MARKET INSIGHT By Mark Arbeter Stocks Show a Stubborn Streak The market hasn't given back its gains despite some overbought readings -- and that could be a sign of strength Last week was an erratic one for stocks, leaving the major indexes little changed as the consolidative action continues. After breaking out to new recovery highs in the preceding week, the stock market has temporarily run out of fuel. While we have been a bit cautious for the short-term, and have expected a pullback due to the many overbought readings with respect to sentiment and internal indicators, the fact that the market has not given in to all these warnings could be a sign of strength. When the market can work through technical conditions that suggest a pullback might happen, the stock market might be telling us that we are underestimating the current strength and that the upside may be more than most are expecting. Expectations for 2005 seem to have reverted to the long-term average for stocks of single-digit returns. The market has a way of not meeting consensus, and with the most favorable year of the decade (years that end in 5 have been huge winners historically), fast approaching, maybe the Street is too cautious in its outlook. For some unknown reason, the middle of the decade has provided very unusual gains for the stock market. The Standard & Poor's 500 index has risen during years that end with 5 over the last seven years. Prior to that, the Dow Jones Industrial Average rose for 5 straight years, starting way back in 1885. The returns for the S&P 500, beginning with 1995 and ending with 1935 have been 34.11%, 26.33%, 31.55%, 9.06%, 26.4%, 30.72% and 41.37%. Starting in 1885 and ending in 1925, the DJIA rose 20.1%, 2.3%, 38.2%, 81.7%, and 30%. By far, years ending in 5 have been the best year of the decade to be invested in stocks and it is hard to argue with this incredible streak, although past performance is not necessarily a valid indicator of future results. The other interesting aspect about the next year or two is that the 4-year cycle low is due sometime in 2006. Most of the lows that occur during this cycle happen in the fall months of September and October. Another cycle that works pretty well is the 77/78-week cycle. This cycle low is expected in the later part of February 2006, giving the market ample time to possibly peak sometime in the middle to later part of 2005. The 77/78-week cycle just bottomed out in early September, just missing the low in August. The cycle also caught or was very close to predicting the lows in March, 2003, September, 2001, October, 1998, April, 1997, May, 1994, August, 1982, March, 1978, and it was within months of calling the lows in 1970 and 1974. The major indexes all ran into some key resistance levels last week, which is another reason we expected a pause in the advance. The Nasdaq moved right up to the highs from earlier in the year in the 2,150 area, and as so often has been the case, failed to take out a major high on the first attempt. Once the Nasdaq can comfortably clear the 2,150 area, chart resistance, from all the way back in 2001, is up between 2,250 and 2,328, with the next layer starting at 2,300. Our next target for the Nasdaq, based on a Fibonacci retracement of 38.2% of the bear market and chart resistance is up in the 2,500 to 2,600 zone. Chart support begins in the 2,075 area and is thick down to the 2,000 zone. The Dow also advanced to near its high for the year and ran out of gas within an area of chart resistance between 10,600 and 10,700. The S&P 500 failed near 1,200, chart resistance from back in 2001 and a piece of psychological resistance. Our intermediate-term target for the S&P 500 remains 1,253, arrived at with both a chart measuring technique based on the width of the latest consolidation and the next Fibonacci retracement of 61.8% of the bear market. Chart support for the "500" is pretty thick from 1,160 down to 1,100. The U.S. Dollar Index finally reversed course in the middle of last week, after moving to its most oversold condition on a weekly basis since the beginning of the year. The index held long-term support from back in 1995 in the 80 area, getting as low as 80.92 on an intraday basis on Friday, Dec. 3. The dollar is certainly due for a counter trend rally and the current strength could take the index back to chart and trendline resistance in the 85 to 87 area. While a continuation of the rally is very possible in our opinion, the long-term trend for the dollar remains strongly bearish. The bond market continues to confound us as we have been calling for higher rates following the recent upside breakout in yields. The 10-year Treasury note reversed sharply last week and added to its gains this week, bringing yields back to the 4.16% area. The basing pattern is still intact following the failed breakout and we still expect to see yields move higher as we move into 2005. That forecast will change if the 10-year yield can break back below the recent low in the 3.95% zone. Crude oil continued lower last week and is in the midst of its first major correction since the spring of 2003. A 50% retracement of the advance since September, 2003, comes in around $41 and a 61.8% retracement lies near $38. Chart support is fairly thick in the $37 to low $40s area. Long-term trendline support, drawn off the major lows in 2001 and 2003 also comes in near $37. 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 September 30, 2004, SPIAS and their U.S. research analysts have recommended 29.2% of issuers with buy recommendations, 58.5% with hold recommendations and 12.3% 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. Disclaimers 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 analyst for Standard & Poor's 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. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
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