From a report issued by Standard & Poor's Equity Research Services on Jan. 9
The stock market has settled down quite a bit, and despite making a new recovery high on Tuesday, Jan. 6, has not really made much progress since the latter part of November. The calmness in stock prices certainly does not reflect the tone of the news, which we think remains abysmal, as illustrated by today's less than stellar January employment report that showed another robust nonfarm payroll decline and big jump in the unemployment rate.
The ability of the market to hang in there, despite taking repeated shots to the head, is certainly a welcome sign, and is a change in character from recent months. Bear market lows can simply be described as price stability in the face of awful news. In other words, investors are simply looking past the dismal economic news and anticipating improvement sometime down the road. While we don't know how many more shots the market can take without dropping to the mat again, the government has seemed to stem the tide, for now, as credit market conditions are improving.
However, the next battle for the government, and these issues are all tied together, is an attempt to rescue the consumer, who seems to have fallen pretty hard over the past couple of months. After years of using the house as an ATM, thereby increasing debt to astronomical levels and propping up GDP along the way, the end in the spending contraction by you and me seems a long way off. Individuals have been adding to their debt burden for years, so it would seem to us that it may take many years for consumers to repair their sick balance sheets.
The good news is that there has been an enormous increase in money supply, pumped in by the Federal Reserve and the U.S. government, and there is more coming. Many times in the past, a boost in the money supply was enough to turn the tide in the economy when everything looked lost. In addition, the consumer is getting a break on the cost side as petroleum prices have plummeted and mortgage rates have tumbled to record lows. It will be interesting to see if all this is enough to now bail out the consumer.
Despite the market's relative lack of movement of late, there have been some remarkable moves by the major stock market indexes. From the bear market low on November 20, 2008 until the recovery high on January 6, 2009, the S&P 500 soared 24.2% in 30 trade days. This was the greatest price rise in a 30 day period for the "500" going all the way back to 1938. This robust price performance unfortunately occurred after one of the worst bear markets in history and one of the worst 30 day periods ever. The 31% plunge into the Oct. 10 low was the worst since 1932.
We think the near- to intermediate-term trend of the stock market remains bullish, as the series of higher highs and higher lows is still intact. We believe the recent pullback in the market can be attributable to two factors. First, the major indexes ran up to some challenging pieces of resistance, and, secondly, some of the sentiment indicators we monitor are reflecting a bit too much enthusiasm.
Overall, the S&P 500 remains trapped in a range where there has been a lot of buying. This range or chart resistance runs up above the 1000 level, and those investors that bought stock during the failed double bottom in October were early and some are still sitting with losses. As prices move higher, there seems to be a fair amount of supply from these investors attempting to get out and break even. On January 6, the "500" ran right up to two pieces of resistance and stalled.
The first piece of resistance was the 65-day exponential moving average. This was the first attempt by the index to overtake this intermediate-term average and many times, the initial try fails. In addition, the index advanced right to the first big Fibonacci retracement zone of 23.6% of the bear market. This retracement targeted the 944 area on the S&P, almost exactly the intraday high on January 6. Many times, and somewhat incredible, these Fibo retracements sit right near other pieces of resistance, making them more valid and harder to get through. The next Fibo line, a 38.2% retracement, sits at 1063, or right above the top of the S&P 500's price range.
The pullback off the January 6 high into Friday's intraday low has so far held some key pieces of near-term support. Chart support sits in the 860 to 915 range and has held very nicely over the past couple of weeks. Trendline support off the November lows comes in at 890, as does the 50-day simple average. The second reason for the pullback in prices, in our view, is the big change in market sentiment, which has pushed some of these indicators to potentially cautious levels. An improvement in sentiment is not surprising given the large gains in stock prices recently, and we think is a prerequisite for a major market low. However, we would prefer to see less jubilation as we are technically still in a long-term bear market.
The 10-day CBOE equity-only put/call (p/c) ratio has dropped from 0.98 on Nov. 21, to a recent low of 0.66. This is the lowest p/c ratio since back in May, right before the market rolled over. The potentially good sign is that the latest pullback is causing some high p/c readings, as the equity-only hit 1.06 on Wednesday, the highest since Nov. 21 and not far from the daily peak in November of 1.16. However, it will take a string of high readings to push the 10-day ratio back into an area that would be more bullish for stocks. Investor's Intelligence is showing that bulls are exceeding bears (41.8% to 34.1%) for the first time since August. At its worst in October, bears exceeded bulls by 30 percentage points, so we have seen a rather large improvement from newsletter writers.
While we think we may need a decline in bullish sentiment, this increase in bullishness also occurred during the bottoming process in 2002 and 2003. Obviously, if sentiment does not improve over the long term, we think stocks have a limited ability to ever bottom out.
Arbeter, a chartered market technician, is chief technical strategist 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.