The Currents in a "Trader's Market"


From a technical standpoint, the positives and negatives in the market outlook balance each other out, says Mark Arbeter, chief technical analyst and senior investment officer for Standard & Poor's. That makes him "neutral to slightly cautious" on the future.

Arbeter notes that the major indexes are in "reversal formations" as the market rallies, but the Dow Jones and S&P 500-stock indexes have not yet regained their highs of last August. Should they do that, he says, the market would turn from bearish to bullish. Among other things he would like to see is some price leadership and volume in a high-growth area.

The charts of a few stocks do look good to him now, however. He names medical-device companies such as Boston Scientific (BSX) and Varian Medical (VAR) and the organic-food purveyor Whole Foods Market (WFMI), as well as exploration and production companies Patina Oil & Gas (POG) and Patterson-UTI Energy (PTEN).

Arbeter made these and many other comments in an investing chat presented Dec. 12 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts follow. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Note: Mark Arbeter is an equity analyst with Standard & Poor's Investment Advisory Services. He has no affiliation with or ownership interest in any company under discussion. S&P's other affiliates may provide services to the companies under discussion.

Q: Mark, the market rally keeps shifting its ground on us. How will we end the year?

A: I'm currently neutral to slightly cautious at this point. I think we will probably end the year not too far from where we are now. There are a fair amount of positives out there -- unfortunately, they're offset by a like number of negatives. The major positives include the fact that the major indexes are in the process of tracing out major reversal formations. Historically, this time of year is usually the best time from a seasonal perspective for stocks.

Another positive is the fact that we're entering the third year of an election cycle, which is typically a positive. The final positive is that there's a four-year cycle low that's due sometime toward the end of this year.

The negatives at this point are that, although the Nasdaq has been able to recapture its August high, the Dow Jones and S&P have not. Those two have not completed their reversal formations, which would change the trend from bearish to bullish. Another net long-term negative is that all three of the major indexes remain in long-term downtrends. There's an enormous amount of overhead and supply resistance for many stocks, and over the last couple of weeks, three of the four sentiment polls that I monitor have moved to bullish extremes. This is not something that bodes particularly well for stocks at this time. So, all in all, I'm neutral at this point, leaning toward the side of caution.

Q: Technically, how important is it to follow volume in the stocks we own?

A: Besides following the price action of the stocks that you own, the second most important technical consideration in following stocks is the volume. The volume tells you what's happening with supply and demand of an individual stock or an index. As stocks are rallying, you want to see a high amount of volume going into the price advance. When stocks are pulling back, you want them to do so on a decline in volume. Typically, at market tops for individual stocks, you will see a pattern of either high-volume days, where the stocks go nowhere (and that's called distribution), or you will see price weakness on an increase in volume, and that's a sign to head for the exits.

Q: Where do you see the money flow going in regard to industries and sectors?

A: Right now, I don't see a strong pattern of money flow moving consistently into any industry or sector. Off the October bottom, there was strong money flow into the technology stocks and the beaten-down telecom sector, but that trend has abated. The problem right now with the market is that we're not getting any real leadership in high-growth stocks. The rotation within the industry and sectors is very quick, and no industries seem to have a lot of staying power at this particular time. And that's typical of the type of market we're in.

Q: With all the volatility of the past 30 months, do you see a bull market coming, or just a traders' market?

A: I think it's too early to say whether we're in a new bull market. So, for the time being, I think we're in a traders' market, or traders' environment. A couple of things that would tell me that we have moved into a new bull market include a completion of the reversal formations of the major indexes, and secondly, we must break above the downtrending bear market trend lines that have existed since early to late 2000. No. 3, I'd also like to see the major indexes move to extreme overbought conditions, which was very typical during the beginnings of the bull markets during the 1990s.

The next thing I'd like to see is some type of new leadership in a high-growth area. I'd also like to see strong volume coming into a price advance. And probably the last thing I'd like to see is a five-wave advance off the bottom. All the rallies so far in the bear market have been three-wave advances. And that is: one rally, one correction or pullback, and another rally that fails. We have yet to see a long-lasting five-wave rally during the bear market.

Q: Where do you see the drug sector going in 2003? And what about TEVA

(Teva Pharmaceutical Industries)?

A: TEVA is probably one of the better-looking charts right now. The stock broke out in late October to new all-time highs on heavy volume after putting in a nice base. The stock has since tested its breakout point and moved once again to new highs. Currently, it's consolidating its recent gains on real light volume, which is also positive. So at the current time, the chart looks very bullish.

Within the pharmaceutical group, there are stocks like TEVA that look terrific on a chart basis, and then there are charts like Merck (MRK) that are way off their all-time highs and probably have more base-building to do before they move into an extended uptrend. The problem with a stock like Merck is that, although it may have put in a reversal formation -- and the worst may, in fact, be over -- there are walls of resistance overhead, which will probably limit any type of upside explosion.

Q: Do you take technical readings of stock sectors, or just of individual stocks within sectors?

A: While I do look at the technical chart conditions of many stock sectors, my primary work involves individual stocks. However, the best stocks to buy from a technical perspective are usually involved with sectors that are showing high relative strength. For instance, if all the pharmaceuticals were breaking out to new highs, that would be a very bullish sign, and it would suggest that institutions are moving heavily into the entire sector. You don't want to try to pick stocks that are sort of sitting out on an island doing well by themselves. You want to see institutions moving into entire groups at the same time, and in that kind of environment you get your best stock performance.

Q: What's your opinion on gold stocks?

A: Gold prices are attempting to break out once again, after basing since May of this year. Right now, the gold price chart looks very bullish, which, by the way, is not particularly positive for the overall stock market. Looking at one of the major gold stocks, which is Newmont Mining (NEM), it put in a nice double bottom over the last couple of months and took out its interim high in the mid-20 area. It looks like it wants to move higher from here, although there's a fair amount of resistance up in the high-20s to low-30s area.

Q: How do you feel about Qualcomm (QCOM)? Where do you see it going?

A: Qualcomm has put in a real nice base down in the mid-20s. However, like many beaten-down tech and telecom stocks, it has moved up into an area of heavy resistance that runs from the 40 to 60 area. So that suggests the chart is probably going to have to do some more basing before it gets into an extended uptrend. But overall, the chart looks fairly positive.

Q: What is your take on telecoms such as AT&T (T)?

A: AT&T has had a nice run after putting in a low in July. However, like many stocks, it has run into an area of heavy resistance that runs from the high 20s up to the 40 area. And that also suggests we could see some more backing and filling before the stock can get into an extended bullish mode.

Q: Are there any tech stocks that look promising now on a technical basis?

A: No, there aren't a lot of technology stocks that look real strong on a technical basis. There are very few, if any, major technology companies that are breaking out to new highs. The problem that I see in the near term for most technology charts is twofold. The first is that a lot of these stocks have run up into brick walls of resistance, which will have a tendency to halt their advance, if not push them lower.

The second problem with a lot of these technology stocks is that many have rallied 30% to 100% off of their October lows. And anybody who bought these stocks down near their lows in October will be looking to take some profits. And that will be another factor that could pressure these stocks.

Q: Mark, are there any good tools on the Web to keep up with the key indicators you watch? Any new books you recommend?

A: One investment site that I frequently monitor is bigcharts.com. If you go into the BigReports section and look at the stock charts ranked by percentage change in price, and percentage change in volume, I think they do a very good job of showing which stocks look the best on a technical basis. Another site that I monitor on a daily basis is Investors.com, which is produced by Investor's Business Daily.

Lots of tools on that site are extremely helpful for the individual investor. Among the books: Technical Analysis Explained by Martin Pring, and Technical Analysis of the Futures Market by John Murphy. Both these books are fairly basic and easy reading, and give you an excellent background for technical analysis. One other book: How To Buy Stocks by William O'Neil.

Q: You mentioned you're neutral on the overall market, but have you seen any stocks break out on a technical basis that would be worth buying?

A: Currently, there's been some strength in the medical-device area, and two names I like there are Boston Scientific (BSX) and Varian Medical (VAR). There has also been strength in the natural/organic food area, and a stock I like there is Whole Foods Market (WFMI). Another area that looks attractive is exploration and production stocks, and a couple that look strong in that area technically are POG

(Patina Oil & Gas) and PTEN

(Patterson-UTI Energy).


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