Huge recovery on the horizon for markets?
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NEW YORK (Reuters) - The warning to ``Beware the Ides of March'' rang true on Wall Street as stock indexes fell in the past two weeks. Still, some technical market watchers have reason to smile.
That's because the pullback came on low trading volumes as well as volatility or price swings -- signs it's more of a buyers' strike than sellers hitting the exits, they say.
``Volume came down, which is a good sign,'' said Al Goldman, technical analyst at A.G. Edwards. ``We did not have an increase in selling in the past weeks. We just had a buyers' strike.''
From the closing bell on March 15 through Thursday, the blue-chip Dow Jones industrial average (^DJI - news) has fallen 1.9 percent, while the tech-packed Nasdaq composite index (^IXIC - news) has declined 1.2 percent and the broader Standard & Poor's 500 index (^SPX - news) has dropped 1.6 percent.
During the sell-off that began March 12 on the Nasdaq, the index had fallen by more than 6 percent from top to bottom. The Dow and S&P, which both began the latest leg of their declines March 20, have fallen by more than 3 percent each.
Technical analysts, who base forecasts on price action and stocks charts, care about volume indicators as a flag to show the strength of an advance or a sell-off.
``The best way to gauge the mettle of the market is to see how it acts during pauses to refresh,'' Goldman told Reuters. ``This market is acting very well.''
On the New York Stock Exchange, daily trade volume has fallen about 13 percent to 1.25 billion shares on average in the past two weeks from 1.43 billion in the previous two weeks, according to NYSE data. In the tech-laden Nasdaq market, activity thinned more than 16 percent to 1.59 billion shares daily from 1.89 billion over the same period of time.
A RALLY TO FOLLOW THE RAIN?
Goldman believes the market is breaking out of a three-week correction.
On Monday, the market closed near its session lows.
This holiday-shortened week began on a lackluster note: About 1 billion shares traded on the NYSE and 1.4 billion on the Nasdaq on Monday, marking the lightest volume day of the year for both exchanges.
Activity was quiet this week, with trading floors thinly staffed before the Passover and Easter holidays.
For the week, the Dow dropped 0.2 percent, the Nasdaq slipped 0.3 percent, and the S&P 500 dipped 0.1 percent. Exchanges were closed for Good Friday.
The latest pullback, Goldman said, is normal, considering the spectacular run that drove the Nasdaq up 45 percent from three-year lows last September through early January. The blue-chip Dow Jones industrial average (^DJI - news) climbed 29 percent from September to mid-March.
The Nasdaq and the Dow average each have room to rise another 10 percent by year end, he adds. For the first quarter, the Dow rose 3.8 percent, the Nasdaq fell 5.4 percent, and the S&P 500 dipped 0.1 percent.
Others are more cautious on the market's prospects.
``Certainly it appears true that the (Monday) decline was the result of an absence of buyers rather than any intense selling pressure,'' said Richard Dickson of Hilliard Lyons.
The only problem Dickson has with seeing this as a positive is that light trading is typical of market declines, he adds.
The much more important features were very poor breadth, or the ratio of rising to falling stocks, on the NYSE, ``indicating widespread participation in the sell-off, and the fact that all the broad market indexes moved to new reaction lows,'' he said.
Lows reached last Thursday, he said, represented violations of key short-term support levels for the Dow (^DJI - news), the Nasdaq (^IXIC - news) and the broad S&P 500 (^SPX - news). The lows that day were: Dow, 10,354.74; Nasdaq, 1,825.99, and the S&P 500, 1,139.88.
This week, the market's three major indexes fell below those levels, a development that Dickson termed bearish. Later, he said if the indexes can close above key resistance -- 10,500 for the Dow, 1,870 for Nasdaq and 1,160 for the S&P -- on heavy volume and in broad rallies, ``we'll have to rethink our correction thesis, at least for the short term''.
On Thursday, the Dow closed at 10,403.94, the Nasdaq at 1,845.35, and the S&P at 1,147.39.
BEARS GROWL AS FEAR FADES
Contrarian pundits remain bearish. They point to a popular measure, the Market Volatility Index (^VIX - news), which hit a 52-week low this week below 20, signaling lack of investor fear. It's at times such as these when the market has taken a turn for the worse in the past, argues veteran technician and trader Bernie Schaeffer of Schaeffer Investment Research.
``The market is going sideways, but the fear level in the options market has actually been on a pretty steady downward path,'' he told financial TV network CNBC. ``This is what we call complacency. This is what we call overconfidence .. and that does not have good implications from a contrarian standpoint.''
During the past three years, observes John Kosar, technical researcher at Arbor Research and Trading Inc., most instances where the Market Volatility Index was at or below 20 did not coincide with the start of a new leg higher in the market.
``Typically, the VIX moves away from 20, at least by a few points, before a new leg higher begins,'' he adds in a note.
AN EASTER BASKET FULL OF DATA
The pundits see other factors besides the holidays behind the lower volumes. For one, investors digested a mixed bag of economic data to determine if the U.S. economy is in recovery mode or headed for a double dip.
``When you have uncertainty, people tend to put their hands in their pockets and not really spend money, regardless of whether it is at the store or buying stocks,'' said Holly Liss, chief technical strategist at Fuji Futures.
Still, Liss is upbeat on stocks: ``What it tells you is that when we have a pullback like we had last week, that is not necessarily significant because it has been on light volume.''
What's surprising about the decline in trade volume is that this week marked the end of a quarter -- the January-to-March period -- when fund managers tend to dress up portfolios with winning stocks -- with so-called ``window dressing.''
``Sometimes you get a pop in volume around that time. But we certainly aren't seeing it right now,'' Liss said. |
