Markets & Finance

Ready for a Retreat?


By Mark Arbeter The stock market added to its recent gains last week but we think there are numerous signs that the rally is extended and that we may see a pullback in the near term. If we do see a small correction, and it occurs on light volume, we believe the rally will take the indexes back to or above the highs seen earlier this year. However, from a longer-term perspective, we do not see a strong, sustainable advance developing as we move into the summer months.

The major stock market indexes have all moved into areas of chart

resistance and this is one of the reasons that we see some contraction in prices over the near term. The S&P 500 has pushed up into an area of chart resistance between 1,190 and the Mar. 7 closing high of 1,225. In addition, long-term

trendline resistance comes in at 1,210. This trendline is drawn off the March, 2003, and August and October, 2004 lows. This trendline acted as

support during the last couple of years, but was broken in April. Trendlines that are broken to the downside become technical resistance.

If we are correct in our projection that prices will pull back in the near term, we believe that there are levels immediately below the index that will provide a floor. Chart support lies in the 1,180 to 1,190 area. The 50-day exponential moving average lies at 1,177 and the 150-day exponential moving average is at 1,171. In addition, a trendline drawn off the lows in April and May lies at 1,170.

The Nasdaq has rallied into an area of chart resistance between 2,020 and 2,100. Long-term trendline resistance, drawn off the March, 2003, and August, 2004, lows, lies at 2,110. This trendline was former support. We see plenty of support just below for the Nasdaq as well. Chart support comes in between 1,990 and 2,020. The 50-day, 80-day, and 200-day exponential moving averages are all sitting near the 2,000 level, so we believe this represents a strong area of support. Trendline support, off the recent lows, lies at the 2,040 level.

Volume on the NYSE and the Nasdaq during the latest rally has been less than inspiring, in our opinion, and is an important reason why we believe there will be a pullback and that the current rally will not develop into a long-term, sustainable uptrend. Since the May 13 low, the S&P 500 has advanced on seven out of nine days. During those seven positive days, volume on the NYSE has been below the 50-day average six times.

A similar picture can be seen with respect to the Nasdaq. Since the May 12 bottom, the Nasdaq has moved higher on nine out of 10 days. Only two of those days have occurred on higher-than-average volume. While we cannot argue too vigorously about higher prices, it is our belief that they are occurring due to a lack of selling pressure and not from robust levels of institutional demand. Strong demand and volume levels are the hallmark of most vibrant bull markets, and light volume at this stage of the cyclical bull market is a sign of age and not vitality, in our opinion.

One of our favorite shorter-term gauges to determine whether the Nasdaq is overbought on a volume basis, and that a pause or pullback may be near, is the 10-day ratio of down volume vs. up volume. This ratio generally oscillates between 0.5 and 3. When the ratio moves down towards 0.5, it indicates that there is very little declining volume relative to advancing volume. Our interpretation of this, based on what has happened in the past, is that the Nasdaq appears to be extremely overbought with respect to the last 10 days of volume action, and that a pause or pullback in the rally is not far behind. On Tuesday May 26, this ratio hit 0.55, which represents a fairly extreme overbought condition by this measure.

Another internal indicator that measures whether the Nasdaq is overbought or oversold is the 5-day summation of TRIN on the Nasdaq. TRIN is simply the ratio of Nasdaq advances over decliners, over the ratio of Nasdaq advancing volume over declining volume. The TRIN or ARMS Index shows whether volume is flowing into advancing or declining stocks. If more volume is flowing into advancing stocks, then the TRIN will be less than 1.0, and if more volume is flowing into declining stocks, then the TRIN will be greater than 1.0.

While it is typically more bullish for the TRIN to be less than one, the indicator can serve its purpose as a reading of whether the market is overbought or oversold. On Tuesday, the 5-day summation of Nasdaq TRIN fell to 2.87, the lowest since last December. Readings below three represent overbought levels and many times in the past have led to pullbacks in the Nasdaq.

Glossary

S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.

S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:

A+

Highest

B

Lower

A

High

C

Lowest

A-

Above Average

D

In Reorganization

B+

Average

NR

Not Ranked

B-

Below Average

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Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.

Required Disclosures

In the U.S.

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.

In Europe

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.

In Asia

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.

Globally

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.

For All Regions:

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

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").

The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.

Disclaimers

This material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. 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 Standard & Poor's fundamental recommendations. Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's


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