PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
From Standard & Poor's Equity Research
The major indexes paused last week, digesting some of their recent gains. With the FOMC meeting on Mar. 27-28, a wait-and-see attitude was not unexpected. Bonds were volatile once again, but had little net movement. Crude oil broke out, hitting its highest level since the beginning of February.
During the week, the S&P 500 index pulled right back to its breakout point in the 1295 area and then bounced higher. This is typically bullish chart action for an index or individual stock. Many breakouts or breakdowns reverse and test their breakout/breakdown points before resuming their primary trend.
The S&P 500 also found support from its rising 10-day exponential moving average during the pullback. There is plenty of support, for the S&P 500, in our view, as the 50-day exponential moving average sits at 1282, trendline support comes in at 1283 and 1278, and chart support lies at 1270.
On the upside, chart resistance is at the recent intraday high of 1310. The 1310 area was hit four times in the last seven trading days, each time putting a ceiling on the "500". Trendline resistance is heavy, coming in at 1311, 1320 and 1342. Fibonacci resistance, based on the width of the latest pullback, targets the 1320 level. The S&P 500 has also broken out of a bullish ascending triangle formation, in our view. The width of this pattern is 46 points, which when added to the breakout point of 1295, gives us a potential target of 1341.
Both daily and weekly momentum indicators remain in bullish configurations and suggest the possibility of an extension to the current rally, in our view. The daily moving average convergence/divergence (MACD) indicator is above zero as well as its signal line, a bullish reflection of shorter-term momentum, in our opinion. The daily MACD has traced out a series of higher highs and higher lows since bottoming out in the middle of February. The weekly MACD is also in a bullish configuration, having traced out a succession of higher highs and higher lows since May 2005. Daily and weekly relative strength (RSI) readings are both around the 60 level, and are not yet considered to be in overbought territory. This, in our view, gives the S&P 500 some breathing room on the upside.
The Nasdaq composite index continues to struggle relative to the S&P 500, as the index has been unable to breakout to new recovery highs. We believe the Nasdaq is being hurt by the action of its larger components, as the Nasdaq 100 is in even worse technical shape. The Nasdaq 100 (NDX) is composed of 100 of the largest non-financial companies listed on the Nasdaq Stock Market. It is heavily weighted towards technology stocks, as they represent about 57% of the index. The NDX is currently trading at 1680, below its closing recovery high of 1758.24 posted on Jan. 11, 2006. Besides the pop in the index early this year, the NDX has been confined to a range between 1634 and 1710 since the early part of November.
Meanwhile, the Nasdaq composite failed once again to clear key resistance this week up in the 2333 area, and remains rangebound. The prior closing high for the Nasdaq came on Jan. 11 when the index finished at 2331.46 and had an intraday high of 2332.92. The failure this week occurred on Tuesday when the Nasdaq made an intraday high of 2332.95 before reversing to the downside. Following Tuesday's bearish reversal, the index found support from its 50-day moving average, which sits 2285. Chart and trendline support sit between 2230 and 2250.
Daily momentum, based on the price action of the Nasdaq, is still positive, while weekly momentum is in positive territory but is starting to roll over. We still believe that the overall market's upside will be limited unless that Nasdaq can get into gear.
Market sentiment has been all over the map for the last month, with some indicators showing high degrees of optimism while others are showing somewhat high levels of pessimism. For instance, the Investor's Intelligence poll of newsletter writers has moved to its most bearish outlook on the market in about three years. Meanwhile, the Consensus poll is still showing relatively high levels of bullish sentiment.
Moving away from the investment polls and to the options market, we see a little more consistency in market sentiment. The equity-only put/call ratio, the CBOE put/call ratio, and the OEX put/call ratio all fell to fairly low levels during the end of 2005 and the beginning of 2006. In our view, as long as put/call ratios are falling, the market has a good chance of moving higher. However, when put/call ratios are rising, we believe that is when you have the greatest chance for a pullback or correction.
Over the last couple of months, there has been clear evidence, in our opinion, that these put/call ratios have bottomed and are starting an uptrend. When put/call ratios reverse to the upside, option investors take off their bullish bets on the market and/or make bearish bets against the market. This ebb and flow within the options market is just one force that we believe causes the cyclical fluctuations in stocks over the intermediate term.
The bond market continues to oscillate in a very narrow range like a Super Ball in a 1-foot room. The yield on the 10-year Treasury note has moved in an opposite direction for the last 10 straight trade days. The 10-year finished the week with a yield of 4.67% following a strong rally on Friday. Daily momentum is starting to wane, an indication that yields may move back to the bottom of the rising channel that has been in place since June 2005. This trendline resistance comes in at 4.5%. However, weekly and monthly momentum is still positive, suggesting the possibility that yields will continue higher over the intermediate- to longer term.
Crude oil prices finished the week at $64.26, the highest close since Feb. 6. Prices, in our view, have broken out of a 2-month base in what could be the beginning of another intermediate-term advance. The next piece of resistance is a 61.8% retracement of the recent decline, which targets the $64.64 level. Above this level, there is strong chart resistance from the peaks in August, 2005, and January, 2006, at the $70 level.
Glossary
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
A+
Highest
B
Lower
A
High
C
Lowest
A-
Above Average
D
In Reorganization
B+
Average
NR
Not Ranked
B-
Below Average
S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.
S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.
Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.
Required Disclosures
In the U.S. As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 28.2% of issuers with buy recommendations, 61.3% with hold recommendations and 10.5% with sell recommendations.
In Europe As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 33.8% of issuers with buy recommendations, 46.8% with hold recommendations and 19.4% with sell recommendations.
In Asia As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 24.8% of issuers with buy recommendations, 53.1% with hold recommendations and 22.1% with sell recommendations.
Globally As of December 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 28.7% of issuers with buy recommendations, 59.1% with hold recommendations and 12.2% 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.
Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY.
Other DisclosuresThis report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").
The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.
DisclaimersThis material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. 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.
For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.
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
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.
Printer-Friendly Version