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Get Four
|  | FEBRUARY 16, 2004
 TECHNICAL MARKET INSIGHT By Mark Arbeter Ready for Rotation? Money may start to move from the red-hot cyclical stocks to the more conservative consumer issues The S&P 500 advanced to a recovery high on Wednesday, Feb. 11, on a nice pickup in volume, but the index failed to see any follow-through. While it is still possible that the "500" could extend the top of its recent range, we are maintaining our forecast that the market has entered a consolidative period that could last two to five months. The "500" moved to a marginal new high of 1,157.76, barely taking out the Jan. 26 closing high of 1,155.37. Trading volume rose from the previous sessions and was much higher than average. Because of the strong volume, it is likely that the index will take another shot at new recovery highs. If the volume on the breakout had been lackluster, we would certainly be more cautious on the near-term outlook and would probably be looking for a potential double top in the "500". The Nasdaq composite index, which has been underperforming the S&P 500 since Jan. 20, failed to post a new recovery high, and looks to be headed for a test of the recent closing lows down near 2,014. The S&P 500 is well supported below so we do not see major damage over the intermediate term. Near-term chart support lies between 1,122 and 1,125 and is from the recent lows of early February and late January. Of more importance is the 50-day exponential moving average that comes in at 1,115. Below here, there is a major trendline (has successfully been tested twice) that lies in the 1,090 area. Additional and more substantial chart support begins in the 1,070 zone. On the upside, the S&P 500 has chart resistance at the recent high of 1,158. Important trendline resistance (drawn off the January, 2003, June, 2003, and January, 2004, peaks) lies at 1,170. Chart resistance, from the peaks in late 2001 and early 2002, is at 1,177. For the Nasdaq, the very important 50-day exponential moving average comes in at 2,037 with trendline support also in that area. Near-term chart support is at 2,014 with more substantial chart support starting at the 2,000 level. Additional trendline support is in the 1,965 zone. Overhead, chart resistance from the recent high is at 2,154. The pullback that occurred during the late part of January and early February alleviated an extremely overbought condition, on a short-term basis. However, from a longer-term perspective, most technical indicators remain overbought. We believe this overbought condition on the weekly indicators will likely limit the upside until there is some consolidative or corrective action over an intermediate-term time frame. Market breadth remains very positive with the NYSE advance/decline line in new recovery high territory and the Nasdaq A/D line near its recent highs. Participation has been quite broad since the lows in March, 2003, and we view this as a major positive. Long-term peaks in the market are usually accompanied by major divergences in market breadth while intermediate-term market peaks usually run concurrent with peaks in the advance/decline line. Since there has been an absence of a bearish divergence with respect to breadth data, a long-term top in the market has most likely not been seen. While market breadth remains strong, there is the possibility that a major rotation from the red-hot cyclical stocks to the more conservative consumer issues is slowly building. The Morgan Stanley Cyclical Index has soared an incredible 85% since March, 2003, and while the chart has not broken down, there are some indications that investors are rotating back towards the consumer area. The Morgan Stanley Consumer Index, after strongly underperforming the M.S. Cyclical Index since last March, has taken a leadership role since Jan. 21. A comparative relative strength chart shows that the consumer index has broken above a key trendline that has been in place since July, 2003, and is working on breaking above its 50-day exponential moving average. However, there is still more work to be done with major trendline resistance, drawn off the October, 2002 peak, still overhead. What this may be telling us is that the long-awaited switch out of technology and material stocks and into large-capitalization consumer issues is in its early stages. Volume breadth has not been as strong as breadth based on price, and is also another indication that the upside over the intermediate-term is probably limited. The 10-day moving average of both the NYSE and Nasdaq advancing/declining volume has been deteriorating since the major peaks in March, 2003. This condition is usually alleviated with either some consolidative action or a full-blown correction. The Treasury market remains rangebound with yields once again down near recent lows. The 10-year Treasury note has rallied back near the 4% area, but will have to move below the 3.91% zone to truly break out of its current range. If that were to occur, it is likely that the 10-year would at least rally to the 3.75% zone. Important trendline support lies up at 4.28% with chart support in the 4.4% to 4.7% area. The Commodity Research Bureau index remains in a strong uptrend after recently testing its 50-day exponential moving average. Gold fell from a recent high near the $425 per ounce level to just below $400, and has since bounced and moved higher, moving back above its 50-day moving average. The U.S. dollar index seems to have traced out at least a short-term low in the 85 area. If the dollar index can turn higher from here, and break above its recent high near 88, further gains would be likely, and would probably lead to further testing by gold down near $400, and a possible break below that level. However, the dollar index remains in a long-term bear market and there are no indications that this trend to the downside has run its course.  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.
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