The market is heading into a very negative seasonal period over the next two months so it will be up to the bulls to keep the party going. So far, they are winning the battle. The set-up is certainly there for a correction during the next two months. The market has had a great run since March with the S&P 500 up 26% and the Nasdaq up over 40%. Plenty of speculative stocks have soared, many from the technology area, so there is certainly some concern that these issues are susceptible to a fairly large retracement.
While we have cautioned about the high levels of bullish sentiment over the past couple of months, one sentiment indicator continues to support higher equity prices. The S&P 500 has seen minor pullbacks in May, June, and early and late August. During each one of these setbacks, and while most other sentiment indicators were showing a high degree of bullish sentiment, the CBOE put/call ratios rose in conjunction with the lower prices. This showed option players were worried that the market was going to roll over and were protecting their investments from any further downside.
The 10-day CBOE put/call ratio rose to between 88 and 90 during each one of these pullbacks while the 30-day put/call moved to between 81 and 83 each time. While these put/calls are not near the extreme levels seen during major corrections, they do show some fear in the marketplace and this is positive. When the market pulls back without a subsequent rise in the put/calls, that might be a very good sign that the market is finally going to develop some downside momentum.
We talked about some deterioration in the markets' internals last week with respect to the absolute level of new 52-week highs on the Nasdaq and the NYSE. Staying with that theme, we will look at relative figures on new highs. The Nasdaq posted 13% new highs/issues traded on June 6, with that number falling to a latest high of 7% on Aug. 28. For the NYSE, there were 17% new highs/issues traded on June 6, 10% on July 7, and 6% on Aug. 28. This weakening in the percentage of new highs, even as the Nasdaq has moved to new highs, is a concern and has frequently led to corrections, some of major proportions.
It is a good time to revisit some interesting statistics of price rate-of-change of the S&P 500 after a major bear market. During the initial stages of new bull markets in 1975, 1982, 1990, and 1998, the 50-day price ROC for the "500" was between 20% to 35% while the 100-day ROC was at least 27%. After the 1932 bear market, the peak in the 50-day ROC after the bottom was 92% and the 100-day ROC was 64%.
One of our prerequisites that the market had entered a new, long-term bull market was for the current data to show this kind of strength off the bottom. So far, the peak 50-day ROC for the "500" has been 17.6% and the peak 100-day ROC was 23%. Those are impressive numbers -- but not quite the kind of strength that has been seen historically.
With the recent breakouts in both the Nasdaq and the DJIA to new recovery highs, a move out of the trading range by the S&P 500 would certainly be a bullish sign. A move out of the range, however, would have to be accompanied by a pretty big pickup in volume, something that has been missing of late. A break above the 1,010 to 1,015 price range would then target a measured move to 1,070. Chart resistance on the "500" begins at 1,050 and gets heavier as the index approaches 1,100. Arbeter is chief technical analyst for Standard & Poor's