Markets & Finance

An Impressive Recovery


By Mark Arbeter The market had a big excuse to extend its losses for the week on Friday, Feb. 11, but once again, it fooled most investors and rallied nicely. The technology giant, Dell (DELL), posted disappointing revenues for the latest quarter after the close of trading Feb. 10 and was down 6% during Friday's session. While the market fell early, it rallied hard during the day, putting Dell's news behind it.

What was really impressive on Friday was the action of the semiconductor stocks, as the Philadelphia Semiconductor Index (SOX.X) rose about 4% and is attempting to break out of a small base. The rally after poor news is certainly impressive in our opinion, but we believe there is still some more work to be done before another upleg can take shape.

The S&P 500 index broke out to its highest level since the end of December and is approaching important chart

resistance up in the 1,215 area. The previous high close in December was 1,213.55 and the intraday high was 1,217.90. A strong close above these levels on good volume would be a needed shot in the arm for the market. If the S&P 500 can break out, our next target would be 1,253.

On the downside, near-term chart

support lies at 1,192. This was the most recent price low. The 50-day exponential

moving average, which can act as support or resistance, is at 1,184. The next piece of chart support from the closing low in January lies at 1,164. For the intermediate-term, there is a broad layer of chart support beginning at 1160 and running down to 1,100.

Trendline support, drawn off the lows in August and October, comes in at 1,145. The 200-day exponential moving average is also at 1,145.

Despite the weakness in January, the price trend for the S&P 500 from an intermediate-term perspective remained positive. That is, the series of higher highs and higher lows was not broken. However, intermediate-term momentum indicators based on the S&P 500's price action did turn bearish. The weekly moving average convergence/divergence (MACD) and the weekly stochastic indicators are still in bearish configurations. The weekly MACD also put in a lower low while the "500" moved to new highs, and therefore has traced out a negative divergence. If the market can continue higher in the near-term, the weekly MACD sell signal will reverse itself.

The weekly stochastic oscillator rolled over after getting very overbought, adding to the significance of the signal. While the weeklies are bearish, the daily momentum indicators are positive and are not yet in overbought territory.

The piece of the market we remain concerned about is the Nasdaq composite index. While the S&P 500 and the Dow industrials are acting like they are going to break out to new recovery highs, the Nasdaq continues to muddle along. The Nasdaq's intermediate-term price trend has been bearish since the second week of January and the short-term price trend is also negative. The Nasdaq has yet to break its pattern of lower highs and lower lows since peaking in December. In our estimation, either the blue chips will pull the Nasdaq higher, or the Nasdaq will pull the blue chips lower. It is unlikely for instance, that the S&P 500 would move into a sustainable uptrend while the Nasdaq continued to move lower.

From a short-term perspective, chart resistance for the Nasdaq lies at 2,087 and then 2,106. The high in December was up at 2,180. Near-term chart support is at 2,009 or the low from January. From an intermediate-term perspective, the 200-day exponential moving average is at 2,003 and the 200-day simple moving average is at 1,978. Long-term trendline support, drawn off the lows in March, 2003, and August, 2004, lies at 1,975.

For all its perceived volatility, the Nasdaq has done very little for over a year and is still in a massive basing formation that started way back in 2001. Massive basing formations are quite common for indexes and individual stocks that have gone through major bear markets. This basing process can take many years if not decades (like Japan's Nikkei index) as institutions slowly weed out the once great stocks and the market discovers new avenues of growth. There was so much stock bought at much higher prices that the mountain of supply can weigh on an index or individual stock for a very long time.

The bond market reversed course late in the week after the 10-year Treasury briefly broke below the 4% level. The 10-year got as low as 3.97% on Wednesday before finishing the week up at 4.09%. As we said last week, there is a large amount of chart resistance in the 3.9% to 3.96% area. The 10-year yield bottomed out at 3.94% in October, 2004, 3.96% in September, 2004, 3.92% in January, 2004, and 3.91% in October, 2003.

From a longer-term standpoint, the bond market is in a similar position as the Nasdaq, just a little more dramatic. Bonds have been in a bull market since 1981 and at some point, that trend will cease. It is our belief that bonds are in the process of tracing out a massive basing formation, and sooner or later; yields will reverse their long-term downtrend and move higher.

Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' 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, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.

Disclaimers

This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. 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.

Readers should note that opinions derived from technical analysis may differ from those of S&P's fundamental recommendations. Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's


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