No Place to Hide

In the current environment, no stock seems safe as institutions sell without reinvesting the proceeds

By Mark Arbeter

Major long-term trendline support on the S&P 500 has been breached as major oversold readings on many technical indicators have failed to produce nothing more than one-day rallies. The trendline drawn off major market lows in 1987, 1990, and 1994, coming in at 940, and using a semi-log chart, provided little support.

The next area of chart support for the "500" is between 720 and 820, and this is from price action back in 1996 and 1997. The next major trendline support, drawn off the tops in 1987 and 1994, comes in the middle of the above-mentioned chart support, around 770. The current bear market in the "500" is now approaching 45%, and is very close to the carnage seen during the 1973-74 bear market, when the S&P 500 plunged 48%.

Incredibly, but no consolation to investors, long-term trendlines on the Nasdaq have yet to be tested. The first major trendline that comes into play for the Nasdaq, which is drawn off the 1974 and 1990 bear market lows, is around 1200. Trendline support off the 1982 and 1990 lows comes in at 925. Initial chart support for the Nasdaq exists between 1200 and 1400, with major chart support in the 980 to 1075 range. The index is off an astounding 74% in just the last 28 months and the decline rivals the 76% drop in the Japanese stock market. However, the Nikkei took 12 years to accomplish that feat.

What has become very frustrating of late is that there has been virtually no place to hide from the downdraft. Stocks and industries that were performing relatively well have rolled over and for the most part, gotten crushed along with everything else. One essential ingredient to the bull market of the '90s was rotation among stocks and groups. For example, when institutions were selling tech stocks, they were buying pharmaceutical stocks. For the most part, they rotated back and forth between investments, creating opportunities for investors to make money, even if the market was not moving higher.

In the current environment, no stock seems safe as institutions sell without reinvesting the proceeds. In the last couple of weeks, housing and housing-related stocks, defense, as well as certain health care issues have been battered. These groups represented the last bastion of strength. We surmise that the recent heavy outflows from mutual funds by investors is preventing any kind of rotation as fund managers keep cash on hand to meet redemptions. In most cases, when the leaders succumb, and individuals bail out of funds, a bottom is not far behind.

Sentiment continues to deteriorate, a prerequisite for a market bottom. Investors Intelligence poll of newsletter writers is now showing more bears than bulls. The current readings are 35.4% bulls and 39.6% -- the first time bears have exceeded bulls since early October. Bearish sentiment rose above bullish sentiment at the bottom in 1998. During that time, bulls fell to 36.2% and bears rose all the way to 47.5%. Another indication that investors are throwing in the towel can be seen in the American Association of Investors poll. Bearish sentiment has risen to 53.75%, the highest since the bear market lows in October 1990.

Total CBOE put/call ratios have remained at relatively high (bullish) levels over the last month and we finally saw an equity-only put/call ratio of over 1.00 today. This is the first 1.00+ reading for the equity-only p/c ratio since the bottom in September, when there were four days over one.

The problem with sentiment indicators as well as other technical indicators is that it is impossible to tell just how oversold they will get before the market turns higher. From a pure technical standpoint, before any bottom can be called, the market needs to demonstrate strong price and volume action. Then, and only then, will the carnage end.

Arbeter is chief technical analyst for Standard & Poor's

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