Please, Make Up Your Mind!

Savvy Investor
Nobody is quite sure if the bull market is over and the bear has emerged from hibernation. One thing for sure: market volatility is driving some analysts and investors crazy

Alex Roslin
Monday, April 7, 2008
Montreal Gazette

If this is a bear market, it doesn’t seem so horrible.

Markets have actually blasted off since some analysts declared a few months ago that the five-year bull run was over.

The S&P/TSX composite index gained 13 percent since its January low as of late last week, while the S&P 500 index was up nine percent since mid-March.

The much-maligned financial sector is actually outperforming handily, with the U.S. BKX Bank Index up 15 percent since its March 17 intraday low.

Not bad for a bear market.

Ah yes, but who can forget what came before. The U.S. housing disaster and debt crunch last summer unleashed violent market selloffs and volatility unlike anything seen since the dot-com crash of 2000-2002.

By last January, the TSX composite index had lost 18 percent since its high of last October. And that was the least of the market woes.

On the morning of Monday, March 17, stocks seemed primed for an especially nasty plunge—with some analysts invoking fears of a full-blown 1987-style crash—after word emerged that the U.S. Federal Reserve Board had had to step in to engineer a bail-out of troubled investment bank Bear Stearns.

After lunch that day, the S&P 500 briefly traded below 1260, more than 20 percent below its October high. That prompted a slew of declarations that the leading U.S. equity index was now in a bear market, most commonly defined as a 20-percent price decline.

Other market sectors fared even worse. Despite the powerful rally of recent weeks, the BKX Bank Index is still down 31 percent from its peak back in Feb. 2007.

Overseas, Japan’s Nikkei Stock Average has gotten drilled since its high of early 2007, falling 28 percent.

But with the world’s major stock indexes now climbing back from the brink, debate is raging among analysts about whether the bull is, indeed, really over.

Some say the other shoe has yet to drop, with U.S. home prices showing no sign of stabilizing and reports suggesting banks and securities firms have declared only one-third to half of their expected housing-related writedowns.

“The U.S. economic slowdown is not over and risks are to the downside,” said Montreal-based BCA Research in a note in late March.

The long-term charts of the markets also tell a sobering story. As markets sold off sharply in early January, the TSX, S&P 500, Nikkei and other major world equity indexes all busted down below the major long-term uptrend lines that had defined the bull market, technically ending their multi-year uptrends.

The indexes also saw another key technical setback. Their 200-day moving averages, a closely watched indicator, turned decisively downward for the first time since the bull began in 2003.

In a note in January, John Murphy, a U.S. pioneer of market-chart analysis, declared a bear market had been confirmed because the major U.S. indexes had just fallen well below their earlier lows set last August when the subprime disaster first hit.

In late March, he said to expect a brief “bear market rally” lasting one to three months, but that would eventually fizzle out.

“Whenever the intermediate rally does run its course, an eventual retest of the recent lows appears likely,” he wrote.

“So while the market is looking better over the short- to intermediate-term, its longer range trend is still in danger.”

Not all analysts are so despondent. Ron Meisels, president of Montreal-based research firm Phases & Cycles, also predicts a rally, but he says it will be more lasting. He believes the TSX, hovering around at 13,500 late last week, will soon run up to test its December and February highs around 14,000, then eventually power up above the highs of last October around 14,500. His final target is 16,000.

In a note in late March, he said the path of least resistance for markets is upward for due, ironically, to extreme investor and advisor pessimism. He noted a survey by research firm Investors Intelligence had found 43 percent of financial advisors were bearish, compared to only 31 percent who were bullish.

“A plurality of bears in this indicator appears very infrequently and usually coincides with major market turns or significant rallies,” Meisels wrote.

Some analysts just wish the market would make up its mind. Mark Arbeter, chief technical strategist at Standard & Poor’s Equity Research Services in New York, said he has never seen such crazed market volatility, even during the dot-com crash.

“I hate this kind of market,” he said. “You get faked out and suckered. I don’t care if it goes down or up, I just want some kind of trend.”

Arbeter believes the market has entered “a mini-bear,” but he added: “I think it’s less important what you call it than where you’re sitting with your money.”

In the short-term, he agreed with Meisels’ contrarian logic that investor sentiment has hit a pessimistic extreme that will likely buoy markets.

Key near-term levels to watch, he said, are the recent highs set this winter and last fall—areas likely to offer strong resistance where markets are prone to fail, provoking more pullbacks.

Other negatives holding back rally attempts, he said, include those major trendline breakdowns and the downward slopes of the indexes’ 200-day moving averages.

In the longer run, Arbeter sees the extremes of bearishness as a good omen. Instead of an out-and-out downtrend for the market, he foresees several months of sideways action followed by an eventually breakout to new highs by year-end.

“When sentiment gets that bad, probably it’s a sign the worst is over.”

[TAGS: bull market, bear market, moving average, trendlines]