Tuesday, January 5, 2010

Stock Market Technical Picture

Mary Ann Bartels from Merrill Lynch is one of my favorite market technicians. She has had a pretty good track record of calling market trends, so I thought her view of the coming few months was interesting:

A new year brings new forecasts
The S&P 500 spent most of November and December within a 3% trading range, which has been resolved to the upside. The importance of this breakout is that there is little resistance above 1120. The NYSE advance-decline line has confirmed the breakout and long-term price momentum is positive with the market above the 15-month moving average. Volume is neutral. The indicator that has called the tactical turns in the market extremely well is the 10-day TRIN trading index, which enters 2010 bullish with an oversold reading. So our call for a correction of the larger uptrend has proven premature. In the near term more gains are likely with first resistance targets at 1200-1230, though we expect a choppy rotational market in 2010.

Possible headwinds in 2010 causing volatility and rotation
Below we identify six events/themes that are more out of consensus and that may impact the market throughout 2010. Here are six items on our watch list:

1. US 10-year Treasury yields break out from a head and shoulders bottom and reach 55.50%, creating possible competition for stocks.
2. Crude oil breaks above $83 targeting a move to $100. A move like this is positive for energy stocks but could prove taxing to consumers.
3. We are in a congressional election year along with a "0" year under the Decennial Pattern. Both cycles have proven very volatile for the market.

4. Sentiment is shifting quickly - the bears are gone for both the professionals and individuals. We still likely need more bulls before sentiment becomes a problem for the market. Further gains in the market may bring in the bulls.
5. The relative price trend for Financials is still negative and needs to be watched. However, Financials enter 2010 oversold with a very large increase in short interest, particularly in Diversified Financials.
6. Volatility overall may be more active in 2010. The VIX index has declined nearly 80% from its peak and the ML MOVE index (a measure of Treasury yield curve volatility) has declined 70%. In the near term the VIX could fall to 16-15, but the risk from these levels appears higher.

Mega-cap multinationals still favored
We believe leadership is within the mega-cap multinationals, which incorporates most S&P sectors. Technology, in particular, remains strong. If this strategy proves correct the broad market breadth move should eventually narrow.

Levels to watch
S&P 500 resistance is 1200-1230. Prior resistance now becomes support at 1120-1100. Our forecast range for the S&P for 2010 was 1250-1325 and remains unchanged.