from the outlook 2/2/04
Though market breadth already had started to deteriorate,
many will fault the hint of rising interest rates for any correction.
What a difference a few words make. Although the Federal Reserve left short-term interest rates unchanged at their lowest level in more than four decades, stock traders used a change in the wording of the central bank’s accompanying statement as a reason to sell.
The Fed no longer says that its policy of accommodation is likely to be maintained “for a considerable period.” It now says it “can be patient” about changing policy. This sounds like a distinction without a difference, but Fed watchers fear it means higher rates are coming.
Traders reacted as if they were shocked by the news, even though economists had been predicting for months that the Fed would raise rates slightly as the economy continued to gain strength. It could be argued that the Fed’s announcement was more an excuse for a sell-off than its cause.
After a solid 2003, stocks appear ripe for some consolidation. Market breadth, which measures the percentage of stocks advancing, was spectacular last year as 458 stocks in the S&P 500 index rose in price. That 91.6% winning edge made 2003 the best year in terms of breadth since Standard & Poor’s began tracking that indicator for the “500” in 1980.
Breadth was already weakening before the Fed announcement—an indication that a correction may have begun before the event that will likely be cited as its cause. Through the close on January 26, only 352 stocks in the S&P 500 were up for the year. But the Fed’s announcement on January 28 did have some effect; the market closed that day with just 288 stocks in the “500” ahead for 2004.
Mark Arbeter, S&P’s chief technical analyst, believes that a consolidation has started. He sees a trading range of 1080 to 1155 lasting between two and five months.
Nevertheless, we still see the S&P 500 closing 2004 at 1230 and advise keeping 65% of investments in equities.
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