Markets & Finance

Where's the Trading Volume?


By Mark Arbeter The stock market bounced off

support last week, helped by a fairly large decline in crude oil prices. However, the rally occurred on lackluster trading volume, a common theme this year. While we believe the oversold bounce could have further to run, we do not see the necessary ingredients for a sustainable stock market advance at this point.

The S&P 500 index and the Dow Jones industrial average had a nice four-day winning streak but failed to make it five after some profit taking hit on Friday. The S&P 500's rebound off chart support at 1,164 propelled the index through some key exponential

moving averages, including the 20-day, 50-day, and 80-day. The index ran up to the 1,192 level on Thursday, which was an area of chart

resistance from the initial low in February. Chart resistance runs from 1,184 up to this year's intraday high of 1,229. Support for the S&P 500 is plentiful with the main piece of chart support in the 1,160 to 1,165 zone. The 150-day exponential moving average lies at 1,171. This moving average provided nice support during the decline into late March.

The 200-day exponential moving average comes in at 1,162. Intermediate-term

trendline support, drawn off the lows in August and October, also lies at 1,162. Long-term trendline support, off the lows in March, 2003, and October, 2004, held during the latest decline and this trendline now lies at 1,176.

The Nasdaq's rally this week took it right to the 2,019 level, a piece of resistance marked by the 200-day exponential moving average. The 50-day exponential moving average lies up at 2,034. There is a layer of chart resistance, created by the sideways trading pattern during much of the year that runs from 2,008 to 2,103. Near-term trendline resistance, drawn off the peaks this year, is at 2,050. Near-term chart support lies down near the recent lows of 1,970. The next area of chart support is down at 1,900.

As we have said recently, the market was set up for a short-term rally as we went into the end of March. This was because the major indexes had moved to areas of important support, and were fairly oversold on a daily basis. The oversold condition was on both a price and an internal basis. We talked about the oversold condition based on price in our last column, and here we will address the oversold condition based on internals.

The 10-day NYSE advance/decline ratio fell to 0.64 on Mar. 22. This was the lowest or most oversold internal reading from this ratio since July, 2002. That time period represented the first of the three bear market lows. The 30-day NYSE advance/decline ratio fell to 1.03 on Mar. 29, the lowest since May, 2004.

With price and internal measures fairly oversold, one may expect a decent advance is in store for stocks. However, strong bull markets rarely see extreme oversold conditions so we are starting to worry that sometime this year, the market may transition back to a bear market. During bear markets, extreme oversold readings are much more common.

Many measures of market sentiment have moved to fairly oversold conditions as well. That is, market sentiment has moved from a high level of bullishness to fairly high levels of bearishness or fear. One market poll that has gone though a complete transformation is the American Association of Individual Investors (AAII). As recently as December, bullish sentiment on the AAII poll was 60.2% and bearish sentiment was only 17.5%. Since that time, bullish sentiment has fallen to 23.2%, the lowest reading since February, 2003. Bearish sentiment has risen to 51%, the highest since March, 2003.

The Consensus poll has gone through a similar change. Bullish sentiment got as high as 76% in early December, and has dropped all the way to 37% in March.

CBOE put/call ratios have also moved from complacency to fear since the November/December timeframe. The 10-day CBOE put/call ratio has increased from 0.68 to a recent reading of 1.02. This is the highest 10-day reading since June, 2004. The 30-day p/c ratio has risen from 0.75 to 0.92, or the highest since October, 2004. There have also been seven daily readings over 1.00 since Mar. 10.

Crude oil prices fell sharply last week, dropping from $57.27 to $53.32 per barrel. This 6.9% decline was the largest weekly drop since the beginning of December, 2004. Important near-term support lies at $52.50. This is where the 50-day exponential moving average comes in and it also represents the intra-day low from Mar. 30. Trendline support, drawn off the lows in January and February, lies at $51, with decent chart support just below there at $50. Weekly momentum is still bullish but very overbought. The long-term trend for oil prices remains higher and with many now calling for the peak in oil prices once again, we still believe higher prices will be seen.

The bond market put in another reversal last week, after filling a gap in yields. The yield on the 10-year Treasury note got as low as 4.39% on Thursday, before reversing and finishing the week up near 4.48%. The gap that yields filled was between 4.39% and 4.44%. Daily momentum for bond prices is still positive, but remains negative on weekly basis. We continue to believe yields are heading higher with the next move in Treasuries up to chart support in the 4.7% to 4.9% range. Our yield target for the current intermediate-term move is the 5.2% to 5.4% zone.

We remain cautious on the stock market and while we think the short-term rally could carry further, we do not sense that it will turn into anything sustainable.

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.

For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.

Readers should note that opinions derived from technical analysis might 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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