Bottom-Hunting on the Street
By Gene Marcial
Are we there yet? That's the foremost question investors are asking -- especially after the stunning reversal by the Dow Jones industrial average off its lows on July 15 -- from a plunge of 439 points at around 2:30 p.m. to a narrow loss of only 45 at the session's close.
Investors want to know whether the market has hit bottom and is finally poised to swing in the other direction. Several tried-and-true contrarians think not. They say the most concrete indicators of a market trough have yet to show up. On the other hand, some veteran market technicians believe that the decline is about over -- if not completely done.
No matter who's proven right, one thing is clear: Both sides -- the hard-core skeptics and the optimistic believers -- think that the bottom is now within reach.
GREED AND FEAR.
"We are quite close to hitting bottom, but I still have yet to see sufficient hard evidence to be convinced that real fear is widespread that would signal a real bottom," says Bernie Schaeffer, head of Schaeffer Investment Research, which keeps close tabs on the greed-and-fear indicators.
Veteran technician Andy Addison, on the other hand, believes that the market's decline is in its "home stretch": For the first time since he turned bearish in April, 2000, "vital signs have shown up to suggest that the decline is near its end," says Addison, president of Addison Investment and editor of The Institutional View, a market newsletter for institutional investors.
Kevin Lane, chief market strategist at Technimentals Research Group, goes even further, stating that the market reversal on July 15 suggests that a "low of some sort has been reached." He describes the market's action as a "hammer bottom," where a trading session -- after an extended decline the stock index continues its decline with a deeper sell-off, but then reverses from the depths to close at or near its daily high.
"NOT THE FINAL LOW."
But since the volume flows on July 15 were "not climactic," says Lane, "we would suggest that it was a short intermediate-term low -- not the final low." As long as the lows on July 15 are not violated, he adds, this market looks like it will rally and "retrace some recent declines."
In defending his bearish outlook, Schaeffer points out that the Chicago Board of Option Exchange's Volatility Index, or VIX, is just below 50, vs. 57.31 after the September 11 attacks. Another indicator -- the ratio of puts (bets that the market will continue going down) to calls (bets that the market is headed higher) -- is showing that the bulls still outnumber the bears -- which tells Schaeffer that professional investors aren't yet all that pessimistic.
He argues that means the selling isn't finished. "I'll be convinced that the bottom is here when the VIX hits 57-58, and when put options outnumber call options" says Schaeffer. Right now, he explains, many hedge-fund managers are selling their call options because they want some protection from the downside. But they're not buying puts because they don't really buy the scenario that things will get any worse for stocks.
"That's the reason why I think the fear factor is not completely there yet," says Schaeffer. He says most investors still believe that the market will snap back sooner rather than late.
DOWNS TO UPS.
What's behind Addison's more positive view? He notes that the stock market averages have approached the downside targets that his work has been projecting -- 850 for the Standard & Poor's 500-stock index and 1250 for the Nasdaq composite. Many indicators tell him that the bottom is near, if not here already.
So far, he says, the percentage of New York Stock Exchange stocks trading above their 10-week moving averages has dropped to 15.5%. Last September, this indicator dropped to 8%. And the Big Board's down-to-up volume has risen to a nearly 9-to-1 ratio. "Important bottoms have been marked by at least one -- but usually a series -- of 9-to-1 down days," notes Addison. He thinks the Big Board stocks are close to doing just that.
The Nasdaq has had one 9-to-1 down-day volume. Indications are this measure is getting close to showing a bottom in both the NYSE and Nasdaq, says Addison.
In addition to the downside acceleration in the market averages in past weeks, he says, the pace of deteriorating fundamental news has also quickened. Each day in past few weeks has brought new corporate "bombshells" in rapid succession, says Addison. This quickening pace of bad news "is typical during the home-stretch of cyclical bear phases," argues Addison.
One more thing: Unlike previous months when investors would bargain-hunt at the opening of trading sessions that followed steep down closes, the pace of selling at the openings lately has accelerated.
To Addison, this is added evidence that investors are beginning to "give up hope" for any meaningful rebound. Although Schaeffer, Lane, and Addison are looking at the market picture from different angles, at least they're all searching for that elusive, slippery bottom.
Marcial is BusinessWeek's Inside Wall Street columnist