An Epic Battle in the Stock Market

S&P's Mark Arbeter thinks the skirmish between bulls and bears could end up being a draw for many months to come

Note: This comment was originally published by Standard & Poor's Equity Research Services on Jan. 30, 2009

As we approach Super Bowl Sunday, we can't help but to compare the matchup between the Steelers and Cardinals to the stock market. We have the immovable Steelers defense against the high-flying air attack of the Cardinals offense. One team will win the Super Bowl. In the stock market, we also have a battle going on, between the bears, who believe we are heading for a depression and much lower asset prices, and bulls, who see the economy recovering in 2009 and are eyeing market valuations not seen in decades. Since late November, the bulls and the bears have been in the trenches trying to move the football [stock prices], but neither seems able to get a first down.

Unfortunately, we think the battle among stock market participants could end up being a draw for many months to come. From the bulls' perspective, we have witnessed enough fear in the sentiment indicators we monitor to make the case that the worst is over. We have also seen a tremendous washout in market internals and subsequent improvement to suggest we have seen a panic or capitulation low. We have also seen both weekly and monthly price momentum gauges cycle into extreme oversold condition, and bullish divergences on the weekly momentum indicators. We are also witnessing monetary and fiscal stimulus on an historic basis, and many times, this stimulus has turned the stock market and then the economy around.

From the bears' perspective, and don't forget they still have the upper hand with respect to the long-term trend of the market, we have yet to even test the November lows, and it seems a long way from completing a bullish reversal. The difference between intermediate- and long-term moving averages remains very wide, suggesting that at best, the market has many more months of price basing before a sustainable uptrend can take place. The bears also have pushing them the relentless train wreck we call the U.S. economy, as well as deteriorating economies overseas. While the credit crunch has shown signs of improving, the second part of the one-two punch on the economy is now being led down by the consumer. And, there of course is the persistent cascading in quarterly EPS reports from so many corporations. We certainly could continue, but don't see a need.

The rally in the market off the recent lows down near the 800 level for the S&P 500 took a couple days to develop, not a great sign in our view, as it shows hesitation by the bulls. Strong rallies in bear markets tend to be characterized by a very quick reversal in prices, not by wavering price action. However, as the rally got under way, it seemed to gather some much needed momentum, and we thought we could at least see the "500" get back to recent highs near 944. Well, maybe that scenario will still play out, but we think the market better turn higher real soon, or we could be getting closer to finally testing the November lows.

The S&P 500 actually broke through some minor resistance in the 850 to 860 area this week, which we thought was a positive sign, only to fallback below this zone. Since the index has now put in a lower high, we are a bit concerned that we are close to rolling over again. Trendline support, off the lows since November, sits at 823 looking out a week, while chart support, from the recent lows, lies at 805. We believe any break below 805 will open the door, once again, for a crucial test of the November lows down in the 740 to 750 zone.

Watch out for the 2nd part of this artcle from MSNBC. This is a regular thing Stock Market being compared to Super Bowl.