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Markets & Stocks

Signs of surrender
Some long-awaited signs of market bearishness have turned up. Does that mean a bottom is near?
August 10, 2004: 1:48 PM EDT
By Mark Gongloff, CNN/Money senior writer

NEW YORK (CNN/Money) - As gloomy as the stock market's been in recent months, it hasn't been gloomy enough for some market analysts who like to see pessimism -- not because they're sadists, but because high levels of woe often lead to market rebounds.

Well, recent days have brought some good news for those analysts: Bearishness has picked up steam.

Last week's sell-off helped a lot, pushing stocks to their lowest levels of the year, through levels that had previously served as props for the market. When they'd touched those so-called support levels earlier this year, stocks had bounced back, convincing traders the market was stuck in a predictable trading range.

Breaking through those levels made traders extremely nervous, and they reacted with a vengeance. The ratio of bearish "put" options to bullish "call" options on the Chicago Board of Options Exchange jumped to 1.38 on Friday, the highest since at least 1995, when the CBOE data begin.

The put-call ratio fell below 1.0 on Monday, when stocks recovered, but mutual-fund firm Rydex Investments reported that some $130 million was shifted from its bullish funds to its bearish funds that day. Jason Goepfert, technical analyst and CEO of Sundial Capital Research, said it was one of the largest such shifts he's seen in four years.

"We have seen a substantial shift in psychology in just a few short days, and so I continue to believe we will see a low of some import in the next few weeks," Goepfert wrote in a note on his web site Tuesday.

"With the readings we have seen over the past two days, I am now becoming increasingly convinced that it will be sooner rather than later."

Technical analysts have also seen some signs of a bottom in the Nasdaq -- for example, during the brutal sell-off on Friday, the number of Nasdaq stocks making new 52 -week lows was the highest since the broader market bottomed out in October 2002.

The tech-heavy index has been something of a leading indicator for the rest of the market, according to Ken Tower, chief market strategist at CyberTrader, a unit of Charles Schwab (SCH: Research, Estimates).

If the Nasdaq has sold off enough that it's ready to react positively to good news -- such as, say, a strong earnings report from tech bellwether Cisco Systems (CSCO: Research, Estimates) Tuesday afternoon -- that could be a good sign for the broader market, too.

"Finally, the market got a reaction after that water torture of a decline in July," Tower said. "People reacted, which is very good in terms of looking for a bottom."

Oil, terrorism, elections -- oh my!

High oil prices have been blamed for the stock market's weakness in recent months, so it was encouraging to see that stocks rallied Tuesday, despite crude oil briefly topping $45 on the New York Mercantile Exchange.

And, even though crude-oil prices have set records in recent sessions, several oil stocks peaked out on or about August 3 and have been in decline ever since, including Exxon Mobil (XOM: Research, Estimates), Chevron Texaco (CVX: Research, Estimates), Schlumberger (SLB: Research, Estimates), BJ Services (BJS: Research, Estimates) and more.

"Maybe that is the first chink in the armor of the uptrend of crude oil prices," Tower said.

Still, Tower and other analysts acknowledged there were still some potential headwinds that could keep stocks from moving much higher right away, including lingering fears of a terrorist attack and uncertainty about the outcome of the November presidential election.

What's more, after Friday's worrisome job report, investors will likely stay nervous for a while about the health of the economy, especially with the Fed apparently dead-set on raising interest rates on Tuesday.

"The basic factors that caused the market to go down remain in place, and I think those worries are going to be with us for the next couple of months," said James Awad, chairman of Awad Asset Management, "certainly until we get third-quarter earnings reports, and maybe through the election."

In other words, the summer doldrums could linger into the fall.

Still not bearish enough?

Other analysts believe things could be a little more painful than that.

For one thing, bearishness is still not wide-spread enough to suit some analysts. The weekly Investors Intelligence survey of about 140 financial newsletter writers shows there are still twice as many bulls as bears out there -- a ratio typically associated with market tops, not bottoms.

In part for that reason, some analysts say stocks still need a sharp correction from their January highs before they will be well-positioned to move much higher. In that respect, the market's rally on Tuesday is a discouraging sign, only delaying the inevitable pain.

"We could see a 3 to 5 percent rally and still be within the context of a declining market," said Paul Nolte, director of investments at Hinsdale Associates, who believes the S&P 500 may need to fall to 1,000 from about 1,073 Tuesday.

"I don't expect to see a sharp movement in stocks -- it will be a gradual erosion over time."  Top of page

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