Markets & Finance

A Bullish Breeze on the Street


By Mark Arbeter The major indexes put in a mixed performance last week. The S&P 500 moved to a new recovery high, the Nasdaq saw some light profit taking while the Dow Jones industrial average moved back up towards 11,000. Bond yields fell slightly and crude oil finished back below $60 per barrel after some mid-week strength. Market sentiment is very bullish on many counts, so in the near term, a further push higher may be tough in our view.

The S&P 500 broke above the previous closing high of 1268.25 on Wednesday, Dec. 14, and is at its highest point since June, 2001. The index is closing in on very important trendline

resistance in the 1282 area. This

trendline is drawn off the highs over the past two years and therefore is somewhat significant in our opinion. This trendline capped prices a couple times in 2004 as well as a couple times in 2005. The more a trendline is tested as either support or resistance, the more significant it becomes. If the S&P 500 can bust through this trendline, the next piece of chart resistance is at 1316, or the high from back in May 2001.

Underneath current prices, there are plenty of

support levels evident for the S&P 500. Immediate support comes from a trendline off the recent lows that lies at 1268. There is also chart support at that level. The bottom of the recent trading range sits at 1250. The 20-day exponential

moving average is at 1256 and the 50-day exponential moving average comes in at 1239. Further chart support lies between 1240 and 1245, from the peaks in August and September.

Market sentiment, which from our perspective, is based on investor emotion, runs from depression to euphoria and back again. Right now, sentiment is approaching euphoria following the latest rally and hope that the Federal Reserve will soon be finished with its tightening cycle. Unfortunately, when market sentiment is tilted heavily towards the bullish side, oftentimes intermediate-term stock market returns tend to be disappointing. We believe there are only two ways to alleviate this sentiment dilemma. The first is a decent sized correction and the second is an intermediate-term pause in the market. Neither is a reason to get too excited about the market as we move into 2006.

Starting with the investment surveys, Investor's Intelligence poll of newsletter writers is presently showing 58.8% bulls and only 21.6% bears. This is the highest level of bullish sentiment and the lowest level of bearish sentiment since August, 2005. From the beginning of August, the market corrected over the next 2-1/2 months. Bullish sentiment rarely gets to or above 60% and bearish sentiment rarely moves below 20%.

The shorter-term Consensus and MarketVane polls are also showing high levels of bullish sentiment. The Consensus poll is a whopping 76% bullish, equaling the level seen in late November 2004. Prior to that, it is the highest reading since January, 2004. The three-week average of the Consensus poll is 73.3%, also the highest since January, 2004. The MarketVane poll has risen to 70% bulls, a level seen a couple of times over the past couple of years but one that is rarely exceeded. The combination of the Consensus and MarketVane polls is 144%, equaling the highs from November and January 2004. The high prior to that was way back in March 1998 when the polls combined for 149% bulls.

The options market is also exhibiting a fair amount of good cheer towards stocks of late, as call volumes have been heavy relative to put volumes. The CBOE equity-only put/call ratio fell to an extremely low level of 0.42 on Thursday, Dec. 15. This ratio has only fallen below 0.40 twice since the beginning of 2003 with both times occurring in December of that year, just prior to the 8-month market pullback in 2004. The 5-day, 10-day, and 30-day equity-only put/call ratios are all approaching the recent lows from back in July, just prior to the market's peak in early August.

The CBOE total put/call ratio fell to an abnormally low reading of 0.41 on Thursday, the lowest level in over five years. The 5-day CBOE put/call ratio fell to 0.64 yesterday, the lowest since January 2004. The 10-day P/C ratio is down to 0.71, the lowest since November 2004.

Another options ratio that is signaling potential trouble comes from the International Securities Exchange (ISE). The ISE Sentiment Index (ISEE) only measures opening long customer transactions on ISE. Transactions made by market makers and firms are not included in ISEE because they are not considered representative of market sentiment due to the often-specialized nature of those transactions. Customer transactions, meanwhile, are often thought to best represent market sentiment because customers, which include individual investors, often buy call and put options to express their sentiment toward a particular stock.

Since this data only starts in October, 2002, we do not have a great history on it, although many times it works well in calling intermediate-term tops and bottoms. High daily readings above 270 have been pretty good at calling tops while low daily readings below 110 have been good at predicting market lows. Of late, there have been multiple readings above 200, which often times have signaled at least a short-term top. In addition, the 21-day exponential moving average of the ISEE has risen to 193, the highest since December, 2004.

Yields on the 10-year Treasury note fell slightly this week, benefiting in some part to the language change by the Federal Reserve. The 10-year dropped to 4.45% and is closing in on important chart resistance at the 4.4% level. This level was the low yield from late November. The 100-day exponential moving average also lies near 4.4%. Daily momentum has rolled over however the weeklies have yet to confirm, but are close. A break below 4.4% could then set the market up for a move to 4.25%.

While we had expected rates to continue higher, they have traced out a lower high in yields and are close to making a lower low for this move. We would also point out that the 10-year Treasury is dictated on a daily basis by the market and not by the Federal Reserve. Just because there is a perception that the Fed is near the end of its tightening cycle does not necessarily mean that long rates can't move higher.

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 Standard & Poor's


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