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Technically Speaking: An Interview with S&P’s Mark Arbeter

The tide may be turning on Wall Street, at least for the near-to-intermediate term. After bouncing off 1278 on a closing basis, and hitting as low as 1266 on an intraday basis, the S&P 500 has

The tide may be turning on Wall Street, at least for the near-to-intermediate term. After bouncing off 1278 on a closing basis, and hitting as low as 1266 on an intraday basis, the S&P 500 has surged back over 1300 and could potentially be in the process of working its way back higher.

We asked Mark Arbeter, Chief Technical Strategist for S&P Capital IQ, for his thoughts on the market’s recent sell-off and subsequent bounce, as well as why he thinks it may be time for investors to move away from the dollar, and why gold could lead the market in the second half of 2012.

EQ: The S&P 500 popped back above 1300 this week after breaking below 1280. Could this be the start of a bullish reversal pattern for the market?

Arbeter: Yes, because I think the S&P 500 and the other major indices are in the process of either tracing out double bottoms or potentially inverse head-and-shoulder bottoms. The key to completing these bullish formations will be for the markets or indices to rally above the late May-highs, and for the S&P 500 that is at around 1335. So in other words, to complete these bullish formations and turn the intermediate-term trends back to the bullish side, we would need a strong breakout over the 1335 level.

EQ: Last Friday saw a major sell-off in the market. Is this the capitulation that the market needs to form a bottom for at least the intermediate term?

Arbeter: I think we saw a mini capitulation with the strong down day last Friday. We were already oversold, and it appeared that, from a technical standpoint, we did have a capitulation. Normally, what you see with mini capitulations is a day where the breadth of the market is very weak and everything is thrown out of everyone’s portfolio. We saw that certainly on Friday. The 10 sectors of the S&P 500, especially the cyclical sectors, were extremely weak and moved very closely together. That correlation suggests that we had a mini capitulation. In addition, what you want to see during capitulation-type activity is extreme bearishness with a lot of the sentiment indicators that I follow.

We certainly saw that with option put-call ratios spiking to fairly high levels. We have also seen some recent weakness in other sentiment indicators. For instance, Wall Street strategists are now recommending their lowest allocation towards stocks going back to the bottom in 2009. I think that’s pretty telling considering the fact that the S&P 500 has only dropped about 10 percent during this recent decline. Back in 2008-2009, the market fell over 50 percent. So even though it wasn’t a total wipeout, I think we did already see the capitulation. Since the size of the top that we recently put in was only a couple months in duration, I was not expecting a major blow off to the downside. I think the sell-off on last Friday sets us up for some gains going forward.

EQ: You’ve been pretty bullish on gold recently. Why do you believe gold is positioned to rally?

Arbeter: Gold prices, as well as gold stocks, seem like they were bottoming just before the equity markets. We had a breakout from a reversal formation on June 1 for gold prices and gold stocks, which have actually put in an almost V-shaped bottom with the low coming in at the middle of May. So I do think gold stocks will outperform here going forward because they were the first to bottom, and I think gold prices and gold stocks are sniffing out more quantitative easing. It’s important to remember that this bottom in gold prices and gold stocks started to occur weeks before the weak nonfarm payroll report, which came out last Friday. So gold activity is suggesting there is more easing coming on a global basis.

The other reasons why I like gold is because I think the U.S. dollar is putting in a top. Sentiment for the U.S. dollar is extremely bullish, which many times marks a peak from an intermediate-term perspective.

In addition, the U.S. dollar has gotten extremely overbought on a technical basis, while at the same time gold prices are extremely oversold. Therefore I think gold leads financial assets here for the rest of the year.

EQ: As you said, the options market indicates a high level of fear. This may have been a reason for the dollar being overbought as investors searched for a safe haven. Do you see these trends reversing?

Arbeter: Yes, because many of the markets reached major turning points, and the dollar’s run is probably over. So we could see some price declines in the U.S. dollar, which will help U.S. equity prices, and probably help commodities even more. One of the reasons the dollar was so strong was that the panic drove a lot of movement into treasury bonds. I think treasury yields are heading higher here, at least for the short-to-intermediate term. Foreigners buying treasury bonds have to convert their currency to dollars, which pushed the dollar up. So when you saw real panic into treasury bonds, it pushed yields to all-time lows.

EQ: If the S&P 500 and major indices have put in their near-to-intermediate lows, does this mean the market will be enduring range-bound trading over the next several months?

Arbeter: I would think so, because even though the S&P 500 fell only 10 percent in the recent pullback, many stocks in the cyclical sectors really got hammered. When that’s the case, and you’re talking about a chart where any stock is down over 15 percent or over 20 percent, when they bottom, it takes some time to repair the technical damage, put in strong bases, and then eventually break out. We’re talking about months, and not weeks in these instances. So I think because of that factor, it will limit the upside here for the major indices and will probably suggest that, for at least the next couple weeks if not months, we could be in some sort of trading range with between the recent lows we saw and the upside on the S&P500 to around the 1350-1360 area. I do expect some very volatile, sideways trading here in the near-to-intermediate term as well.

EQ: With many sections of the market are reaching or have reached major turning points, how should investors approach the market?

Arbeter: We’ve had all these markets pushed one way or the other. For instance, the dollar and treasury prices pushed higher, stocks pushed moderately lower, and gold pushed pretty hard to the downside. These charts were either extremely overbought or oversold, and at the same time, you saw sentiments really either get bullish on the assets that were rising or get very bearish on the assets that were falling. So it’s a real key time for investors to go away from what was working and go into the areas that have not been working as well. So look at gold and the stock market, particularly the cyclical sectors. At the same time, if you happen to be in bonds or long the dollar, lighten up or get out and move back to the risky assets.

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