S&P's chief technical analyst thinks it may take some more time for major indexes to trace out a bottom
From Standard & Poor's Equity ResearchThe stock market tried to pick itself up off the canvas last week, but like a tired and aged heavyweight, fell right back to the tarp. Some pieces of technical data are pretty washed out, suggesting the possibility that the majority of the slide is behind us. One has to wonder when and if the very positive seasonals will take hold.
The S&P 500 index had its second best day of the year on Tuesday, Nov. 13, rising 2.91%, just missing out on the top day this year of 2.92% on September 18. The Nasdaq rose 3.46% on Tuesday, the best one-day jump since April, 2003. The problem with these one-day wonders, at least for the short term, is that they did not occur on an increase in volume, and they pushed many major indexes right to key areas of resistance. Although volume on the exchanges on Tuesday was above average, it was lower than Monday's volume. During rallies when the market is trying to bottom out, we like to see volume rise, especially on a very large up day.
The Nov. 13 rally pushed many indexes right back to pretty stiff overhead resistance that was not likely to give in during an initial bounce. The S&P 500 rallied right back to the recent breakdown point in the 1490 area. The actual intraday high on Wednesday was 1492, and it was like the market ran into a brick wall. Besides having stiff chart resistance in this zone, it also represented a 38.2% retracement of the recent slide. If that wasn't enough, the 80- and 200-day simple averages also sat up in this vicinity and represent potential resistance.
So far, the attempted bottom is playing out like clockwork. Prices get very oversold, internals get oversold, sentiment reverses back to the cautious side, we hold at prior support, get a rally into initial resistance, fail and rollover back to the first low. Now it's up to the bulls to make a stand.
We believe the key zone in the near term for the S&P 500 is the Nov. 12 closing low of 1439. This area was tested on Wednesday and Thursday as the "500" dropped to 1443/1444 on an intraday basis, and so far has held. As we said last week, we think precisely calling a bottom to this pullback will be a little more tricky than normal. Potential support is all over the place because the summer reversal formation was very wide, ranging from 1370.60 to 1503.89. The most important piece of chart support sits between 1370 and 1433. This area has not yet been tested. So far, the 325-day (65-week) exponential average, which sits at 1444, has been the closest piece of support to be tested. This average has been great support during the bull market, and has provided a floor for the index on six different occasions since August 2003.
The other difficulty we are having is that the rally from mid-August to the end of October was somewhat short when comparing it to many of the prior intermediate-term advances. Does that mean the pullback will also be on the short end of the stick? If we are in the process of tracing out a low, we have not been falling long enough for many of our sentiment gauges to fully cycle into oversold territory.
In addition, considering the size of the latest pullback, we think that a sufficient size base should be longer than four or five trading days. Something just seems like this "potential" bottom is happening a bit too quickly. Not to be forgotten, this is an expiration week, which can also temporarily influence stock price movements. The telling sign, in our view, will be for the S&P 500 to make a stand at the recent lows, and then blast through Wednesday's high in the 1490 area.
Many times during a pullback or correction, the stocks and indexes that were the most extended from a price or momentum standpoint are the ones that get hit the hardest. This is very clear when looking at the Nasdaq. The index had been outperforming the S&P 500 very nicely since May, but then rolled over sharply as October turned to November. On an 8-day rate-of-change basis, the Nasdaq was off 9.62% at Monday's close, giving up more than half of the gains incurred during the 2-1/2 month rally. Talk about taking one on the chin. This, incredibly, was the worst 8-day performance for the Nasdaq since September 23, 2002, or right near the bear market low.
From an internal basis, we are also seeing signs that the Nasdaq may be washed out on the downside. The percentage of Nasdaq new 52-week lows relative to issues traded hit 12.2% on Monday, November 12, the highest since reaching 15% on August 8. During pullbacks and corrections since the bull market started, new lows/issues traded have peaked in the 6% to 15% zone. Sometimes a positive divergence develops, but we have not seen this yet. The 10-day average of down/up volume on the Nasdaq has jumped to 2.80, the highest since near the bottom in August. This ratio has topped out between 3 and 4 for the most part since the bull started. Another way to spin this data is to look at the 10-day summation of Nasdaq up/down volume. This ratio fell to 0.57 on Monday, very close to the levels seen during the summer lows and also near levels posted near other intermediate-term bottoms over the last couple of years.
So, in some regard, we have seen some panicky action by investors that can many times mark the region of an intermediate-term bottom. However, we think it may take some more time to trace out a bottom, as a fair number of our indicators have not cycled far enough. The speculative juices have been wrung out a bit, but think there could be more, especially in the emerging markets arena. These highfliers have corrected, but they have given up only a small portion of their recent gains.