Over the last year or so, the market has had to deal with the worst news flow in many, many decades. While there are still concerns that must be dealt with, it seems like everything is starting to come up roses for the market. Fundamentals are improving, albeit slowly, global tensions have dissipated for the most part, oil prices have plummeted, the housing market remains robust, long-term interest rates continue to decline, the dollar's collapse should be good for corporate profits, and corporate scandals as well as Wall Street's problems have at least temporarily been put to rest.
While all these in combination have contributed to the bottoming process since last July and the powerful rally since March, we believe the primary reason for the sudden surge in prices has been liquidity driven. In other words, it has been propelled by both monetary and fiscal stimulus. The beginnings of many bull markets are fueled by monetary or fiscal stimulus, but this can only last for so long, so it will be important for this stimulus to start translating into more robust numbers from both the corporate world and from the economy.
During the last two days of the week, the S&P 500 attempted to break through critical
resistance on numerous occasions but was stopped cold. The key resistance levels for the "500" are 962.70 on a closing basis and 964.84 on an intraday basis.
The other piece of key resistance for the index is the bear market
trendline drawn off the peaks of the last couple of years. This resistance line has declined to the 955 level and although the "500" did close above this trendline Friday, it is not yet significant enough because it was only by a couple of points. To be safe, we like to see stocks and in particular indexes, break firmly above resistance levels, before getting too excited.
We also like to see resistance levels taken out on a burst of trading volume. As we have said, if the S&P 500 can break above the 962.70 level with conviction, the trend for the index will have changed to bullish for the first time since the prior bull market ended. While we have not seen the characteristics of yet that a secular or long-term bull market has taken hold, a breakout of the top of the 10-month trading range would be very bullish and suggest that the market is in the midst of at least a cyclical bull market.
If and when the breakout finally occurs, it would be the first time the S&P 500 has been able to trace out a series of higher highs and higher lows since the late 1999, early 2000 time period. In its simplest definition, a bull market is a period of higher highs and higher lows. The "500", from a pure chart perspective, has limited resistance overhead, and could conceivably run up to 1050 before encountering trouble on the charts.
As we have pointed out recently, many other indexes have already broken out to new recovery highs while the "500" and especially the Dow Jones industrial average have lagged. The Nasdaq broke out in early May and has been outperforming the S&P 500 since it bottomed out in October. The Nasdaq has minor chart resistance at 1600, trendline resistance just below 1700, and very thick chart resistance up at 2000.
For the most part, volume patterns continue to suggest that stocks are under a period of accumulation. When the market corrects, it has done so on a decrease in volume and when the market rises, it has occurred on higher volume. Accumulation/distribution models remain in bullish configurations, suggesting the current move is still in place.
As we mentioned last week, longer-term accumulation/distribution patterns are also bullish. The 50-day exponential moving average of the NYSE up/down volume recently hit 2.27 or the highest level since February, 1991. This one measure has a good record of anticipating new bull markets. When we look at this moving average over the last 30 years, it has repeatedly climbed to at least the 2.2 level right at the beginning of every bull market. It rose to this level in January, 1975, August, 1982, October, 1987, and February, 1991.
We are almost leery about mentioning our concerns about sentiment, because that has led us to be too cautious recently. Eventually though, the bullish extremes in many sentiment indicators will at least lead to an intermediate-term pause in the markets' advance, if not a decent correction. But until we see a breakdown in price and accumulation/distribution patterns, it is not yet wise to call for an intermediate-term top. Arbeter is chief technical analyst for Standard & Poor's