By Arnie Kaufman
A rolling capitulation appears to be in progress, as the market's persistent and steep decline has caused institutional and individual investors to begin throwing in the towel. This implies that the bottom is close.
The rate of change (ROC) in the S&P 500 since September, 2000, or over the past 100 weeks, is minus 37%, the worst 100-week ROC since the end of the 1973-1974 bear market, according to S&P chief technical analyst Mark Arbeter. Over the 36 trading days since the peak in May this year, the "500" has declined 17%, approaching the 36-day ROCs of September, 2001, March, 2001 and August, 1998, each of which preceded a healthy rebound.
As support levels have given way and the S&P 500 has sunk to a nearly five-year low, psychology has deteriorated dramatically. Bargain hunters have been quickly beaten back by mutual funds facing redemptions and by foreign investors worried about our scandals and the weakening dollar. Forced selling of stock held on margin has also played a role in the rout.
In the process, the measures Arbeter looks to as signals of a likely turn have been falling into place one by one over a period of a couple of weeks. Put-call ratios were the first to reach capitulation levels, followed by the VIX volatility indicator, the percentage of investment newsletters that are either bullish or bearish, and overall trading volume.
Certainly, many investors burned badly in the decline are looking for better opportunities to get out and will be selling into any strength. This overhead resistance will be particularly tough on the big-cap tech stocks that have been decimated since March, 2000.
Improving corporate earnings, however, should help sustain a rally. Year-to-year profit comparisons over the balance of 2002 should look good, thanks to the strengthening economy, 2001's anemic results and a beneficial change in the accounting for goodwill. For the year, S&P analysts see operating earnings on the S&P 500 gaining 31% from 2001, though still falling short of 2000 and 1999 levels.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook