Wall Street sees signs of a bottom

NEW YORK (CNNMoney.com) -- Wall Streeters who are betting that the stock market reached a bottom point last month were encouraged by Tuesday's action.

Oil prices settled at a record high of $100.88 a barrel. The January Producer Price Index showed that wholesale inflation surged at the fastest pace in 16 years. Consumer confidence fell to its worst level in five years. And another report showed home prices plunged in December at the end of a brutal 2007.

And stocks climbed.

Sure, there was some positive corporate news: IBM (IBM, Fortune 500) had upbeat things to say about 2008 and S&P told troubled bond insurer MBIA (MBI) that it wasn't going to cut its top-tier rating.

But a few weeks ago the data would have dominated the company news and stocks would have fallen sharply. Investors would have bailed on worries that the combination of slow growth and higher inflation would lead to a noxious environment known as "stagflation," not to mention a recession.

Those worries clearly haven't evaporated, and another big shock could send stocks lower again. Wall Street's behavior both Tuesday and over the last month suggests that while stocks aren't out of the woods, they have hit a short-term bottom.

"Today you had some numbers that clearly gave more evidence of inflation, but the market seemed to take it OK," said John Wilson, chief technical strategist at Morgan Keegan. He said that the stock market is starting to react well to good news and to take in stride the bad news, a sign that the psychology is improving.

He said that it also appears that the market is shaping up from a technical perspective: It is looking more and more likely that the selling has found a floor, at least for now.

Looking at the numbers

By the third week of January, stocks had been sliding more or less for three months, since October 2007, when the Dow and S&P 500 hit record highs and the Nasdaq hit a multi-year high.

Recession fears had left the Dow and S&P 500 down around 18% apiece from their highs and the Nasdaq down 22%. For the Nasdaq, that meant the index had met the technical definition of a bear market, falling at least 20% from cyclical highs.

A global market selloff set stocks up for another brutal selloff on Jan. 22 and the Dow opened down around 450 points. But the blue-chip barometer ended the session at 11,971.19, a decline of just 128 points, as investors took comfort in the Federal Reserve's emergency interest-rate cut, the first inter-meeting cut since the aftermath of the Sept. 11 terror attacks.

Stocks slipped a bit the next morning when the Dow hit a trading low of 11.644.81, before it began to climb back with the rest of the market. Stocks ended the day sharply higher and the Dow erased all of its losses and posted a gain of nearly 300 points.

That turnaround is what technical analysts call a reversal, and it was a big one at that. Since then, stocks have been choppy, falling as low as 12,069.47 on Feb. 11, but not breaking down below that Jan. 23 level. At least not yet.

Now what?

More and more, it is looking like stocks put in a bottom, Wilson said. However, stocks are now flirting with the high end of the trading range, and if they can't break through that level - around 12,767 on the Dow, he said - they could get knocked back down to within a few percentage points of that bottom.

"I think, in the short run, that we saw a bottom on January 23, but I still think that it's possible to test the lows again," said Art Hogan, chief market analyst at Jefferies & Co.

He said there's a consensus that economic growth will pick up a bit in the second quarter and more so in the last half of the year.

By the end of the second quarter, many of the tax rebate checks that are part of the government's $170 billion plan to stimulate the economy will have been sent to consumers. That money may help juice the economy in the second half. So would better earnings, better GDP growth and the impact from the recent Fed interest rate cuts.

Until then, even if a bottom has indeed been found, stocks are bound to remain volatile.

"Longer term, I think we'll see an economic recovery and higher share prices," said Phil Orlando, chief equity market strategist at Federated Investors. "But in the next few months, I think we could go back to those late January levels first."