But while it is certainly possible that the market could move back up to its recent recovery high of 963, a scenario we outlined a couple of weeks ago, another failure is highly probable and would set the stage for the crucial retest of the July lows.
We continue to see plenty of technical problems with the market for the intermediate-term, with probably the most simplistic being the very poor chart condition of so many stocks. There are so many issues, both big and small, that are in major downtrends -- and in no condition to begin a sustainable uptrend.
What is striking when looking at charts of many stocks is that the weakness is not limited to technology and telecom. A chart analysis of the 10 largest S&P 500 stocks (23% of the index) on a weekly basis is not a pretty one. The 10 biggest, listed by market capitalization, are General Electric (GE
), Microsoft (MSFT
), Wal-Mart (WMT
), ExxonMobil (XOM
), Pfizer (PFE
), Johnson & Johnson (JNJ
), American International Group (AIG
), Citigroup (C
), Coca-Cola Co. (KO
), and IBM (IBM
). All but two (Wal-Mart and J&J) have either broken down from major topping formations and moved to new bear market lows or are in the process of tracing out major tops.
Other stocks that are for the most part household names (blue chips) are also in very poor shape technically and they include Intel (INTC
), Cisco (CSCO
), McDonald's (MCD
), Micron Technology (MU
), Merck (MRK
), and Schering-Plough (SGP
). Until these major stocks put in constructive intermediate-term bases, the upside is most certainly limited, and the market looks increasingly susceptible to further downside action.
The lack of volume remains a big problem for the stock market. While we expected weak trading volume figures in August, as many people took vacation, there has not been a noticeable increase in volume during September. Bull markets begin with a strong thrust of volume while bear markets drag on in mostly anemic fashion. Institutions are clearly not excited about the market from the long side, and until they come back in off the sidelines, the slow erosion in prices is likely to continue.
Another negative for equities is the continued strength in the Treasury bond market. While lower bond yields have historically been positive for the stock market, the current disconnect is disturbing. The 10-year Treasury note is in the process of setting another new low in yields for the current advance and may be suggesting that the economy will not rebound as strongly as many believe. The 10-year has been in a narrow, bullish channel since late March and shows little sign of abating.
A continued drop in Treasury yields would be a negative for equity prices. If and when the stock market reverses to the upside, we would like to see yields break their bullish trend and move higher once again, signifying that money is coming out of bonds and back into stocks. This may be one of the confirmations that the worst is over for equities.
We continue to see the market retesting the July lows in the next couple of months and still believe that these lows have a good chance of being taken out with new lows occurring for the current bear market. Arbeter is chief technical analyst for Standard & Poor's