Big Rallies Won't Tame This Bear

Unfortunately, one or two bullish days is not enough to alter the negative trend

By Mark Arbeter

For some unknown reason, Wall Street has become bullish on Thursdays. Two out of the last three Thursdays have been pretty dramatic for the bulls. On Thursday Apr. 5, the major averages soared from the outset and never looked back. The Nasdaq surged 8.9%, its third best gain ever, while the S&P 500 and the DJIA both climbed over 4%. On Mar. 22, another Thursday, the S&P 500 plunged intraday only to recover most of its losses in heavy volume.

Unfortunately, one or two bullish days is not enough to change the trend from bearish to bullish. Short-term, the large advance on Thursday did not even allow the S&P 500 or the Nasdaq to break out of their respective bearish channels that have been in place since early February. But, more importantly, the formations of both indexes have yet to trace out a typical intermediate-term bottom, which takes longer than the short-term, two-week double bottom attempt by the "500".

Historically, it has taken a fair amount of time to turn a bear market around. For instance, the bottoming process for the S&P 500 took about three months to complete in 1974, the low in 1982 took five months, the 1990-91 bottom lasted almost five months and the near bear market of 1998 took a month. Three of these were double bottoms while one (1990-91) was a head-and-shoulders bottom.

Considering the severity of the decline, especially the Nasdaq, the best that we can hope for is that the bottoming process will end in three to five months or in the Summer/Fall timeframe. This unfortunately makes the assumption that most of the decline is over, we rally from here, and then do some testing of the recent lows this Summer or Fall.

For the most part, market internals have been lousy. The NYSE advance/decline line has rolled over after showing some real good strength from December to early March. There has been very little strength from an individual stock perspective. Up/down volume indicators on both the NYSE and the Nasdaq are negative. New lows as a percentage of issues traded on the Nasdaq hit 13% early this week, the highest level since tax-selling season in December. Over recent history, when this measure jumps above 10%, the Nasdaq has moved to a new low.

Sentiment measures continue to improve, but considering the weakness of the market, we do not think that there is enough fear as of yet. The 30-day CBOE put/call ratio hit 0.77 this week, the highest since 1998. However, in 1998, the ratio went to 0.88. The daily put/call ratio has only exceeded 1.00 on two occasions during the decline since early February, while in 1998, the put/call ratio exceeded 1.00 on eight days. The highest reading in 1998 was 1.28 but the recent high has only been 1.07. The VIX or volatility index has hit 40 three times on an intraday basis since March 22, but in 1998, the VIX hit or was above 40 on 27 days.

Investors Intelligence sentiment numbers have improved but still are not close to where they should be at a market bottom. The bulls are still stubbornly high at 49% while the bears have increased to 38%. At major bottoms, we should at least get to a 40/40 split. In 1998, bulls fell to 36% with bears peaking at 47.5% and at the market low in Dec. 1994, bulls fell to 31.6% and bears jumped all the way to 59%.

The potential for sub-1000 closes on the S&P 500 and sub-1500 closes on the Nasdaq have not changed. For an end to the bear market, we must see some type of major bottoming formation, as well as more pessimism on the sentiment side.

Arbeter is Chief Technical Analyst for Standard & Poor's

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