Markets & Finance

Stocks: More Strength Likely


By Mark Arbeter The stock market has taken a breather following the major indexes' run-up to important

resistance levels last week. The indexes are also facing a short-term overbought condition that has often led to a pause in rallies in the past.

We believe the stock market is poised to take another run at new cyclical bull market highs in this seasonally strong period. Gold prices broke to the upside again, and are trading at the highest level since 1988, while bonds rallied sharply.

The S&P 500 ran into

trendline resistance up at 1238 early last week before pulling back. This trendline is drawn off the highs from August and September. In addition, the index is bumping up against chart resistance that runs up to the cyclical bull market high of 1245. The intra-week pullback was very small, as the index did not even fall back to its 10-day simple moving average. Near-term chart

support begins at 1230 and runs down to the 1200 zone.

Overhead resistance, above the 1245 level, comes in at 1253. The 1253 level represents a 61.8% retracement of the bear market. Fibonacci retracement, in our view, has been very accurate in predicting support and resistance levels since the bear market bottom in October 2002. Trendline resistance, drawn off the highs from earlier this year comes in at 1260.

Besides bumping up against some key resistance levels, the S&P 500 has moved to a fairly overbought condition on a short-term basis. The 6-day relative strength index (RSI) recently hit 78, its most overbought condition since June. The 14-day RSI is at the 60 level and is not yet considered overbought. The daily stochastics oscillator (14, 5, 5) is very overbought, and is also suggesting the possibility of an additional pause in the recent rally. The 10-day rate-of-change (ROC) of the S&P 500 recently rose over 4%, considered an overbought condition, and the highest ROC reading since last November.

The Nasdaq has gotten very close to its cyclical bull market peak -- its Aug. 2 closing high of 2218.15. Once this level is taken, the next key level in our view is up at 2230. This comes from trendline resistance drawn off the highs over the last couple of years. In our view, this is a critical piece of resistance for the Nasdaq as it has contained prices since the beginning of 2004. If the index can take out this formidable piece of resistance, the next area of overhead is up at 2340, the high from back in 2001. This level also represents the beginning of a lot of accumulation from back in 1999, just before the Nasdaq took off on its historic run to 5048.62. Like the S&P 500, the daily stochastic oscillator and 6-day RSI based on the Nasdaq are in overbought territory but intermediate-term momentum indicators are not yet overbought.

There appears to have been a fairly quick shift in market sentiment over the last two to four weeks as investors have embraced the market's strength. Investor's Intelligence poll of newsletter writers is currently showing 53.1% bulls and 22.9% bears. This is the lowest percentage of bearish sentiment since early August and it is also the widest spread between bullish and bearish sentiment since that same time period. Over the last two weeks, bullish sentiment has jumped by 6.7 percentage points, the largest 2-week jump since June, 2004.

The American Association of Individual Investors (AAII) poll has also moved quickly to the bullish camp with 58.6% bulls and 23% bears. This is the highest level of bullish sentiment since December 2004, right before a correction. Just two weeks ago, the AAII poll was showing only 32.1% bulls and 46.2% bears. Bullish sentiment on the AAII poll over the last two weeks has increased 26.5 percentage points, the largest rise since April 2004.

Put/call ratios on the CBOE have dived sharply over the last month as option investors have moved quickly out of the bearish camp. The 10-day CBOE put/call ratio has fallen from 1.11 on October 13 to 0.82 on November 11. The 30-day CBOE put/call has dropped from 1.02 on October 12 to 0.89 on November 16. From a ROC perspective, these are the fastest drops in the put/call ratio over a 25-day period since November 2004. While these rapid moves from bearish to bullish sentiment is part of the process of putting in a bottom and then moving higher, we are concerned about the speed in which investors seem to be moving to the bullish camp.

Gold prices have broken out again and are trading at their highest level since December 1987. Gold has been in a bull market since March, 2001 and has risen almost 90% since that bottom. Prior to this advance, gold had been in a bear market after peaking at $850/ounce in January, 1980. Historically, gold has been a hedge against inflation and often moves in the opposite direction vs. stocks. The next major piece of resistance for gold is up at the $500 level. There is chart resistance at $500 as well as psychological resistance. The $500 area was major resistance for gold back in 1987 and 1983. This week, the XAU gold index broke out to its highest level since 1996. While we do not make gold price forecasts, the trend is very strong and a break above $500 would be very bullish on a long-term perspective, in our view.

Treasury bond yields fell back below the 4.5% level last week, and in the process, broke through trendline resistance that has been in place since early September. Daily momentum indicators have turned bullish, suggesting that the rally has some room to run. Chart resistance begins in the 4.4% zone and that was the yield high from back in August. Fibonacci retracement resistance lies between 4.42% and 4.25%. We believe that after the rally runs its course, the 10-year Treasury will push higher and approach the 5% area late this year or early next year.

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.

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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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Required Disclosures

In the U.S.

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 28.7% of issuers with buy recommendations, 60.3% with hold recommendations and 11.0% with sell recommendations.

In Europe

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.8% of issuers with buy recommendations, 44.8% with hold recommendations and 20.4% with sell recommendations.

In Asia

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 28.1% of issuers with buy recommendations, 51.1% with hold recommendations and 20.8% with sell recommendations.

Globally

As of September 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 29.3% of issuers with buy recommendations, 57.7% with hold recommendations and 13.0% 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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