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Technical Market Insight
NEW YORK, Jul. 28 (Standard & Poor's) - Very early in the year, we called for another market top sometime in the summer time period. There has been a seasonal trend of major strength from November to April, which sometimes carries over into the summer months. In 1998 and 1999, this pattern worked out very well. The S&P 500 and the NASDAQ put in major tops on July 17 and 20 in 1998, respectively, and both topped out on July 16 in 1999. We have not mentioned the possibility for a mid-July top recently because the major indexes all topped out in March with the NASDAQ and the Russell 2000 going into bear markets.

Well, it happened again, at least on a short-term basis. The markets recent highs occurred on July 17, and since then the NASDAQ has declined 14% in 9 trade days while the "500" has fallen 6%. Since the markets have already corrected quite a bit this year, especially the NASDAQ and the Russell 2000, we believe the current weakness is only short-term in nature and not the beginning of another major downdraft.

During the weakness in the April/May period, one type of indicator never gave us much comfort that a sustained and durable advance could begin once the lows were in. A couple of major sentiment indicators never got close to extreme levels, usually seen at major market bottoms. With the seasonals turning negative for the next two months, maybe some of these sentiment numbers will move to levels more appropriate before the next up leg begins. Actually, some of these sentiment numbers have gotten close to bullish extremes of late, which is not very comforting.

The investment advisory poll hit 54% bulls, close to the peak seen in April of almost 57%. The 10-day CBOE put/call ratio has almost fallen to the same level it posted in mid-March. These excessive levels of bullishness, along with the fact that these indicators never got close to excessive bearish readings during the April/May period, indicate that another wash-out would be the most preferable course for the market to correct these sentiment imbalances, so that another, more sustainable advance could take place. NASDAQ internals have deteriorated very quickly and in some cases have fallen below the levels seen when prices hit a bottom in May. The difference between up and down volume on the NASDAQ has cratered below the May levels but remains above the extreme levels seen in April.

New highs on the NASDAQ have fallen off a cliff as the stocks that tried to break out recently have failed. Not a great sign for the momentum driven index. New NASDAQ lows have shot up dramatically as institutions and investors continue to dump the once high-flying Internet stocks. Right now, the all-important NASDAQ leadership is nowhere to be found. The NASDAQ fell into a gap, which was created on June 2 when prices opened sharply above the previous days close. The gap is between 3583 and 3695 and sometimes these pockets represent a turning point for indexes and individual stocks. Decent chart support comes in at the low to mid 3600s with further chart support all the way down to 3500. The pattern that the NASDAQ has traced is somewhat similar to the 1990 market bottom in which a secondary low was put in 3 months after the major bottom in Oct. '90.

Tough calling a bottom yet but when things have looked the worst in the past, usually that means the worst is past.

28-Jul-2000 18:00:17 (02939829)    Copyright 1997 - 2009 Standard & Poor's Investment Advisory Services LLC. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without prior written consent from Standard & Poor's.