Markets & Finance

A Successful Test for Stocks


By Mark Arbeter The stock market did some more testing of the recent lows last week, and in our view at S&P Equity Research, was hurt by some profit taking and renewed mid-week strength in energy prices, especially natural gas. So far, the testing process has been successful for the major indexes, and it could be setting the market up for another run higher as we move towards the end of 2005.

The S&P 500 fell to 1250.91 on an intraday basis on Thursday, very close to the recent closing low of 1249.48 on Nov. 30. If this short-term chart

support level gives way, there is intermediate-term chart support in the 1240 to 1245 zone. The index broke below its 10-day exponential

moving average but the 20-day exponential moving average provided support as this average comes in at 1250.

Trendline support, drawn off the peaks in August and September, lies at 1235 with the 50-day exponential average at 1233. During the latest testing phase, trading volume has not been real heavy, another positive in our view.

Some of the daily momentum oscillators have worked off their overbought condition while others are still in the process. The 6-day relative strength index or RSI has dropped from an extreme overbought condition of 90 down to a neutral reading of 47. The 14-day RSI has declined from an overbought level of 75 down to a neutral reading of 58. Both the daily stochastic oscillator and the daily moving average convergence/divergence have rolled over to the downside from overbought territory, suggesting in our opinion that further sideways to slightly lower action is needed before the next leg of the advance can begin.

Weekly momentum indicators are giving off mixed signals at this point. The weekly stochastics indicator is very overbought, but has yet to roll over to the downside. Weekly RSI levels are approaching overbought levels but are not there yet. The weekly MACD is currently in a bullish configuration but has not yet broken above the levels seen in August. Therefore, the weekly MACD is still working on a long-term, negative divergence as prices have made a series of new highs while the MACD has put in a succession of lower highs.

The 50-week price rate-of-change (ROC) based on the S&P 500, after peaking in February, 2004, has been flat over the last year and a half. The 100-week ROC peaked in February 2005 and has been falling ever since. The 150-week ROC is still in an uptrend but looks toppy. Oftentimes, these longer-term ROC lines peak and begin to fall prior to a bull market top.

The Nasdaq index also tested its recent low in the 2230 area. In addition, the index tested its breakout point, which is defined by a trendline drawn off the January and August highs. Oftentimes, following a breakout, an index or individual stock will retrace back to the breakout point before resuming its advance. Chart support for the Nasdaq sits at 2218 and the 50-day exponential moving average lies at 2189. Chart

resistance is up at the recent high of 2273.

An important component of the Nasdaq, semiconductor stocks, also did some testing this week. The Philadelphia Semiconductor index (SOX.X) pulled right back to its breakout zone on an intraday basis Thursday, and rallied from there. In our view, this raises the probability of additional gains for the semis and the Nasdaq.

Market sentiment on some investment polls is getting downright frothy, in our view. While high levels of bullish sentiment do not necessarily mean a top is in, they do bear watching. Sentiment, in our experience, has to start swinging the other way before a correction can gain steam. The short-term Consensus poll hit 74% bulls last week, the highest reading since December, 2004, which just happened to represent a short-term peak for stocks. Combining both the Consensus and MarketVane polls gives us a reading of 143% bulls. This is highest since November 2004 when this combination hit 144%. The only other times that this reading rose to this area was January 2004 and March and April 1998. Both those times represented peaks in the market.

The 10-year Treasury bond yield pulled right back to its 50-day exponential moving average on Thursday, Dec. 8, at 4.46%, before reversing back to the upside on Friday. The 10-year finished the week at 4.54%. In our view, Treasuries have been consolidating since early November and have worked off their overbought condition. Chart support remains in the 4.6% to 4.7% area and a break of this zone would then target the 4.9% to 5.0% range. Short-term Treasury bills remain in a strong uptrend with little deterioration in weekly momentum. This suggests to us that the short end of the curve has further to run and that the Federal Reserve is not done raising the federal funds rate.

Crude oil prices were volatile last week, running up to close at $60.66 per barrel on Thursday, Dec. 8, before getting hit Friday and finishing the week at $59.39. Crude oil ran into important trendline resistance, drawn off the peaks since the end of August, right above the $60 level. The inability of crude to finally break out and reverse its intermediate-term downtrend suggests that some basing is required. Chart support sits in the $58 to $59 area.

Daily momentum is positive while weekly momentum has flattened out but has not yet turned positive. We believe crude oil will eventually break to the upside as commercial hedgers (considered smart money) are long this market and large speculators (considered dumb money) are short this market. Oftentimes, when we have seen this combination, the oil market has broken higher.

Gold futures surged last week, with the February contract closing at $530.20 per ounce, the highest since 1981. Gold has broken above the channel that it has traded in since 2001 and is very overbought on both a daily and weekly basis. The next Fibonacci target for gold is $550, which represents a 50% retracement of the bear market from 1981 until 1999. While we believe that gold has further to run -- but a correction is probably not far away.

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

S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.

S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.

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 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 Stanbdard & Poor's


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