From Standard & Poor's Equity ResearchThe major indexes paused last week, digesting some of their recent gains. With the FOMC meeting on Mar. 27-28, a wait-and-see attitude was not unexpected. Bonds were volatile once again, but had little net movement. Crude oil broke out, hitting its highest level since the beginning of February.
During the week, the S&P 500 index pulled right back to its breakout point in the 1295 area and then bounced higher. This is typically bullish chart action for an index or individual stock. Many breakouts or breakdowns reverse and test their breakout/breakdown points before resuming their primary trend.
The S&P 500 also found support from its rising 10-day exponential moving average during the pullback. There is plenty of support, for the S&P 500, in our view, as the 50-day exponential moving average sits at 1282, trendline support comes in at 1283 and 1278, and chart support lies at 1270.
On the upside, chart resistance is at the recent intraday high of 1310. The 1310 area was hit four times in the last seven trading days, each time putting a ceiling on the "500". Trendline resistance is heavy, coming in at 1311, 1320 and 1342. Fibonacci resistance, based on the width of the latest pullback, targets the 1320 level. The S&P 500 has also broken out of a bullish ascending triangle formation, in our view. The width of this pattern is 46 points, which when added to the breakout point of 1295, gives us a potential target of 1341.
Both daily and weekly momentum indicators remain in bullish configurations and suggest the possibility of an extension to the current rally, in our view. The daily moving average convergence/divergence (MACD) indicator is above zero as well as its signal line, a bullish reflection of shorter-term momentum, in our opinion. The daily MACD has traced out a series of higher highs and higher lows since bottoming out in the middle of February. The weekly MACD is also in a bullish configuration, having traced out a succession of higher highs and higher lows since May 2005. Daily and weekly relative strength (RSI) readings are both around the 60 level, and are not yet considered to be in overbought territory. This, in our view, gives the S&P 500 some breathing room on the upside.
The Nasdaq composite index continues to struggle relative to the S&P 500, as the index has been unable to breakout to new recovery highs. We believe the Nasdaq is being hurt by the action of its larger components, as the Nasdaq 100 is in even worse technical shape. The Nasdaq 100 (NDX) is composed of 100 of the largest non-financial companies listed on the Nasdaq Stock Market. It is heavily weighted towards technology stocks, as they represent about 57% of the index. The NDX is currently trading at 1680, below its closing recovery high of 1758.24 posted on Jan. 11, 2006. Besides the pop in the index early this year, the NDX has been confined to a range between 1634 and 1710 since the early part of November.
Meanwhile, the Nasdaq composite failed once again to clear key resistance this week up in the 2333 area, and remains rangebound. The prior closing high for the Nasdaq came on Jan. 11 when the index finished at 2331.46 and had an intraday high of 2332.92. The failure this week occurred on Tuesday when the Nasdaq made an intraday high of 2332.95 before reversing to the downside. Following Tuesday's bearish reversal, the index found support from its 50-day moving average, which sits 2285. Chart and trendline support sit between 2230 and 2250.
Daily momentum, based on the price action of the Nasdaq, is still positive, while weekly momentum is in positive territory but is starting to roll over. We still believe that the overall market's upside will be limited unless that Nasdaq can get into gear.
Market sentiment has been all over the map for the last month, with some indicators showing high degrees of optimism while others are showing somewhat high levels of pessimism. For instance, the Investor's Intelligence poll of newsletter writers has moved to its most bearish outlook on the market in about three years. Meanwhile, the Consensus poll is still showing relatively high levels of bullish sentiment.
Moving away from the investment polls and to the options market, we see a little more consistency in market sentiment. The equity-only put/call ratio, the CBOE put/call ratio, and the OEX put/call ratio all fell to fairly low levels during the end of 2005 and the beginning of 2006. In our view, as long as put/call ratios are falling, the market has a good chance of moving higher. However, when put/call ratios are rising, we believe that is when you have the greatest chance for a pullback or correction.
Over the last couple of months, there has been clear evidence, in our opinion, that these put/call ratios have bottomed and are starting an uptrend. When put/call ratios reverse to the upside, option investors take off their bullish bets on the market and/or make bearish bets against the market. This ebb and flow within the options market is just one force that we believe causes the cyclical fluctuations in stocks over the intermediate term.
The bond market continues to oscillate in a very narrow range like a Super Ball in a 1-foot room. The yield on the 10-year Treasury note has moved in an opposite direction for the last 10 straight trade days. The 10-year finished the week with a yield of 4.67% following a strong rally on Friday. Daily momentum is starting to wane, an indication that yields may move back to the bottom of the rising channel that has been in place since June 2005. This trendline resistance comes in at 4.5%. However, weekly and monthly momentum is still positive, suggesting the possibility that yields will continue higher over the intermediate- to longer term.
Crude oil prices finished the week at $64.26, the highest close since Feb. 6. Prices, in our view, have broken out of a 2-month base in what could be the beginning of another intermediate-term advance. The next piece of resistance is a 61.8% retracement of the recent decline, which targets the $64.64 level. Above this level, there is strong chart resistance from the peaks in August, 2005, and January, 2006, at the $70 level.
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: