Bear on the Rampage

The market is probably close to a bottom -- but a long way from any sustainable move higher

By Mark Arbeter

The bear market in the Nasdaq continues to worsen and the bear tag may very well spread to the S&P 500. With a close below 1221.97, which the index fell below intraday on Friday, the S&P 500 will have officially fallen 20% from its March 24, 2000 high, and entered a bear market.

Both the Nasdaq and the S&P 500 plunged to new lows last week, with other indexes also getting hurt. The Nasdaq dropped to its lowest level since December 1998 while the "500" fell to its lowest level since February 1999. The NYSE, which had been looking pretty good from a chart perspective, fell apart this week and moved back to the bottom of its recent sideways consolidation.

Major market lows usually occur when investors throw in the towel and dump everything, and that is basically what we witnessed last week.

The Nasdaq may be attempting to trace out a double bottom in typical fashion. The second low of a double bottom usually exceeds the first low and can scare many market participants into wholesale selling. During the double bottom in 1998, the index fell an additional 5.4% during the second low, from close to close. The April/May 2000 bottom saw prices fall 4.7% below the initial low. A 5% decline from the initial bottom on the Nasdaq, which occurred on January 2nd, comes in at 2177, very close to the levels we saw Friday on an intraday basis.

The second low in 1998 fell 9.5% from the first closing low to the intraday low on the second bottom. In 2000, the same setup witnessed an 8.4% drop. A 9% decline would take the Nasdaq to 2085 during this potential double bottom, or about another 71 points below the intraday low seen Friday.

Another interesting fact is that volume is lower on the second low and that is what is shaping up this time. During a retest of the price lows, new 52-week lows usually contract. So far, new lows as a percentage of total issues traded have contracted sharply during this second decline. On Dec. 20, new lows on the Nasdaq hit 16.7% of issues traded and as of yesterday, they were only 4%. The secondary low many times also takes on the configuration of a big reversal day, closing well above the lows of the day, which we saw Friday.

However, it is very important to mount a rally in the very near-term and push above the previous bottom, which is now resistance and comes in at 2292. The worst thing that could happen is a rally back into that area and then another rollover to the downside. One problem in calling a true double bottom is that the formation is not complete until the previous high at 2859 is taken out. That would take quite a rally from current levels.

What we have not witnessed yet, which is usually necessary for a market bottom, is many sentiment indicators moving to extreme fear levels. The CBOE put/call ratio has only exceeded 1.00 one time during the markets entire decline since March 2000. This occurred on October 18th, with the highest reading since being 0.97 on December 14th. During 1998's bear market, there were multiple readings above the 1.00 level and it is suprising that more fear has not spread to the options market.

The volatility index or VIX exceeded 40 during the lows in 1997 and 1998 but this reading has not moved much above 35 during the latest decline. The VIX measures option premiums and basically measures fear within the market. Higher fear levels in these measures would certainly be preferable considering the carnage that has been seen and would give us more confidence in calling for some type of intermediate-term low.

The market is probably close to a bottom but a long way from doing anything sustainable on the upside. Certainly the potential for an intermeeting Fed cut is there, and at this point looks almost necessary to turn the ship around.

Arbeter is Chief Technical Analyst for Standard & Poor's

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