Markets & Finance

Blue Chips Hit a Wall


By Mark Arbeter The blue chip indexes ran right up to chart

resistance at the recent highs and failed. While this is fairly typical action for an index or individual stock, we continue to believe that some caution is warranted due to the lagging action of the Nasdaq index and to what we see as the reluctance of institutions to come back into the market in a more aggressive manner. Leadership is also suspect, in our opinion, as the market has been led by cyclical and some defensive industries, not areas that usually can propel the major indexes into a sustainable uptrend.

The S&P 500 closed at 1210.34 on Wednesday, Feb. 16, almost equaling the Dec. 30 close of 1,213.55. Many times after a move higher and then a pullback or correction, the market will mount a rally back up to the previous highs and then have a very small or shallow retracement. If the pullback is modest, and occurs on lower than average volume, the market is then set up to break out to new highs. Key short-term chart

support for the S&P 500 is in the 1,190 to 1,200 area. If the S&P can hold this zone and then reverse, it is our belief that the index will finally break out to new recovery highs.

If the S&P 500 moves into a deeper slump, the likelihood is that the current consolidation will last a little longer, with more testing action in store. Chart support from the January lows comes in at 1,164 with long-term chart support just below there at 1,160. The 150-day exponential

moving average and trendline support also lie in the 1,160 zone. The 200-day exponential moving average is at 1,148, with long-term trendline support at 1,156. A strong break above the 1,220 level would then target the 1,253 zone.

The internal action of the NYSE remains mostly favorable in our view and suggests that the blue chip indexes will break higher. The NYSE advance/decline line moved to a new recovery high this week, as the breadth of the market continues to support higher prices. However, volume breadth has not been as powerful as price breadth. The advance/decline line of advancing volume vs. declining volume has yet to move to a new recovery high, failing to take out the highs seen in December. The peak in NYSE new highs hit 405 on Feb. 4, not far from the levels seen back in the beginning of December.

Momentum indicators based on the price action of the S&P 500 are still mixed, and not lined up for a sustainable move higher, in our view. The daily moving average convergence/divergence (MACD) is in a positive mode while the daily stochastic oscillator is in overbought territory but has not yet rolled over. The weekly MACD remains negative despite rallying back to its signal line. The weekly MACD has put in a negative divergence, posting a lower high while the S&P 500 was hitting new recovery highs in December. The weekly stochastic oscillator remains bearish, having moved to a very overbought condition and then rolling over. Both the daily and the weekly relative strength index are neutral, or in other words they are neither overbought nor oversold.

The Nasdaq's price and volume action continues to be a concern, in our opinion, lagging the blue chip indexes since the beginning of December. The tech-heavy index remains stuck deep within a consolidative pattern, showing few signs of life. One of the problems with the index relates to it being a market cap weighted index. The 4 largest stocks in the Nasdaq -- Microsoft (MSFT), Intel (INTC), Cisco Systems (CSCO), and Dell (DELL) -- make up 17% of the index. These mega-cap stocks were huge winners during the technology bubble, but have come back down to earth and stayed there. The top 14 stocks in the index, not all tech stocks, make up a whopping 33% of the index. The big winners of the past are having problems technically, and this is reflected in the performance of the index.

We believe the Nasdaq is in the process of testing its January lows down near the 2,000 level. The index has once again fallen below its 50-day exponential moving average and is currently trading near its 80-day exponential moving average. The 200-day simple and exponential moving averages come in at 1,981 and 2,006, respectively. Long-term trendline support drawn off the lows in March, 2003, and August, 2004, lies near 1,980. This trendline is very important, in our opinion, because it has supported prices during the cyclical bull market. If this trendline is taken out, it will certainly raise questions about whether the Nasdaq is moving back from a cyclical bull market to a cyclical bear market, all within the confines of a secular bear market. On the upside, near-term chart resistance lies at 2,100 and then up in the 2,160 to 2,180 area.

In the week before last, the yield on the 10-year Treasury note briefly pierced the 4% level. But last week, the 10-year yield reversed course sharply and yields continued higher. The 10-year yield surged to 4.27% on Friday, Feb. 18, and could be headed for an important technical test of the highs from December up in the 4.4% zone. We believe a break above the 4.4% level could be real trouble for bonds, and might also keep a lid on stocks. A breakout in yields above 4.4% would then target the 4.7% to 4.9% zone, or the highs from back in the middle of 2004.

Longer-term, yields have been heading higher in very erratic fashion since bottoming out in June, 2003. From a very long-term perspective, we believe bonds are in the process of reversing the super long-term bull market that started way back in 1981. Because that bull market lasted so long, it could take a long time to reverse such a powerful trend.

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 our fundamental recommendations. Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's


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