Good night everyone. See you in the morning. Another market bottom article:
Technical Market Insight November 24, 2008, 5:44PM EST text size: TT
Unprecedented Times for the Stock Market
Where are potential levels of support for the S&P 500 index? S&P's Mark Arbeter has some ideas
By Mark Arbeter
From Standard & Poor's Equity ResearchFrom a Standard & Poor's Equity Research report released Nov. 20
The massive rally and key reversal on Nov. 13 seems like a distant memory as the major indexes have once again broken to the downside. The selling remains heavy, the buying almost nonexistent, and until the supply/demand equation changes, it is simple economics: lower prices.
The rally late last week unfortunately turned into a one-day wonder as we simply did not get any much needed price follow through. At least the rallies off the October 10 and October 27 lows took the S&P 500 up to just above the 1000 level. This time, we only got as high as 911 on a closing basis and then quickly rolled over to new bear market lows. On Wednesday, the index broke the prior closing low of 849 posted on October 27, and it appears that the market has entered yet another downward spiral.
With the breakdown, everyone is asking where the next "potential" support is for the "500." At this point, it is almost a moot question. We will give some possible levels of price support, but at this point, our only answer is, "The market will bottom when it is ready to bottom". Almost everything we look at from a technical perspective suggests we should be rallying, but that obviously is not happening. The final arbiter and only thing technically that is working is price and the short, intermediate, and long-term trends remain bearish. We attempt to get out in front of the curve, using sentiment and market internal data as leading indicators for future price action. Sometimes this is very fruitful, and other times, it is just simply best to wait for price to trace out a bullish reversal formation and long-term moving average crossover systems to give long-term buy signals.
The first piece of potential support for the S&P 500 is the October 9, 2002 closing low of 776.76. I never thought we would revisit this level, but here we are, testing this critical long-term support level. We should get a counter trend rally off this major long-term low, in our view, and will have to see if we finally get some price follow through and demand from institutions. Absent a stand at the 2002 bottom, we could see a measured move to 692 based on the width of the recent price consolidation which was 156 points.
The Nasdaq started to break down on Monday and there was no doubt about the breakdown after Wednesday's washout. The index is now back into the price reversal pattern from back in 2002 and 2003 with the range of potential chart support that starts up near 1500 and runs down to the October 9, 2002 bear market low of 1114. Based on the width of the recent consolidation, we could see a measured move all the way down to the 1168 level.
The selling pressure on the Nasdaq has been wicked of late, pressing many index internals to some of the most lopsided levels of all time. While volume during Wednesday's confirmed breakdown was about average, the supply/demand figures were absolutely abysmal. Nasdaq declining volume was 44 times greater than advancing volume, exceeding the level of October 19, 1987, and the greatest for our dataset back to January 1978. Supply does not have to be great to send prices lower if there is virtually no demand. Any asset has an intrinsic value, an economic value, a fundamental value, but in some periods these don't matter. Currently, assets are only worth what people are willing to pay, and yesterday, there weren't many buyers.
One very good sign from Wednesday's trading day was the spike in CBOE put/call (p/c) ratios. The total p/c ratio closed at 1.41, very close to the recent highs of 1.51 on October 6 and 1.47 on September 15. Daily levels above 1.40 have been fairly rare historically, and show an extreme level of fear in the options market. The equity-only p/c ratio soared to 1.16 on Wednesday, almost reaching the most recent high of 1.18 on September 15. This has pushed the 10-day equity-only p/c ratio to 0.93, the second highest level since 2002, and only exceeded by the March 17 print of 1.00. Extremely high levels of p/c ratios indicate high levels of fear in the options market, and many times, have represented time periods near major market lows. However, little from the sentiment side has been working lately, so buyer beware.
Another market level we never thought we would be talking about is a 3% yield on the 10-year Treasury. Unfortunately, lower Treasury yields are a function of lower stock prices as investors continue to head for cover. Back in June 2003, the 10-year Treasury yield fell to 3.1%, and today, we hit that yield on an intraday basis. These are the lowest yields for the 10-year going back to at least 1962. But, aren't lower rates good for the economy and mortgage rates? Of course, except during a credit crisis when spreads for mortgages and corporate rates remain way above risk-free rates. It seems pretty simple: If you want to help the U.S. economy and its many strapped consumers, lower mortgage rates, allowing many individuals to refinance their homes and cut their primary monthly payment by a few bucks. This would improve individuals' income statements, make housing more affordable, and maybe help us start to get out of the current situation.
Crude oil prices fell to $50/barrel today, the lowest since the last major bottom in January 2007. A break of the $50 level would open the door to the next piece of chart support from the pivot low from December 2004 of $40/barrel. Prices have fallen below the key bull market trendline that goes back to 1998, and if they drop much below the prior low from January 2007, it brings into serious question whether the long-term secular bullish trend for crude oil is over. But, aren't lower oil prices good for the economy and the pockets of individuals and corporations? This is a much easier question than the one in the prior paragraph. Absolutely yes!
Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's . |
