Poised to Plunge, the Market Tiptoes Back From Capitulation

SAN FRANCISCO -- Friday's big losses generated expectations that today would prove to be some sort of capitulation session. Such expectations were heightened after big losses in overseas markets sparked a swoon in futures trading this morning.

But after trading as low as 9493.55 in the early going, the Dow Jones Industrial Average recovered to end fractionally lower at 9605.51. The Nasdaq Composite rose 0.5% to 1695.38 after trading as low as 1669.94. Meanwhile, the S&P 500 rose 0.6% to 1092.54 after trading as low as 1073.15, a break of its March 22 intraday low of 1081.24.

So, was that it? Did the much-ballyhooed, eagerly anticipated capitulation session just occur?

No, according to the conditions prescribed for such a session by John Roque, senior analyst at Arnhold and S. Bleichroeder (and occasional RealMoney.com contributor) in a report this morning. To wit:

The number of stocks registering new 52-week lows on the Nasdaq totals more than 400; today's total was 275;

The CBOE Market Volatility Index rises to at least 40; today, it rose to as high as 37.35 before closing down 1.4% at 33.87;

The one-day Arms Index closes above 3.0; today, it closed at 0.68;

Declining volume equals 90% or more of total volume on the New York Stock Exchange or over-the-counter trading. Today's respective figures were 53.5% of 1.25 billion and 48.6% of 1.57 billion.

"It's fair to say" today wasn't the washout, Roque said in a postclose interview, noting investors' positive reaction to RF Micro Devices (RFMD Quote) was further evidence sentiment hasn't hit bottom. (The firm's shares rose 2.2% after the company announced it expects break-even second-quarter results rather than a loss.)

"I think today's action just ends up prolonging the difficult time," Roque said. "I still think it's appropriate to be cautious."

Maybe the great capitulation hunt is one of those deals where if "everyone" is looking for something, it's much less likely to occur.

Does a Towel Thrown in an Empty Sauna Make Noise?

A quick rundown of some of GuruVision's favorites finds a similar pattern as today's market -- a hint of capitulation, but nothing close to a wholesale give-up.

The biggest evidence of towel-tossing came from Jeffrey Applegate, chief investment strategist at Lehman Brothers and one of the Street's most steadfast bulls. Today, Applegate announced cuts in his year-end target for the S&P 500 to 1375 from 1450. He also cut S&P 500 earning estimates to $49.25 per share from $50.50 for 2001 and to $59 from $61 for 2002.

But Applegate's new price target represents a 25.8% gain from today's close and his earnings projection for 2002 remains above the Thomson Financial/First Call consensus of $56.54 (his 2001 estimate is slightly below the consensus of $49.42). Thus, it's hard to argue he's been reborn bearish.

Among others who've recently donned rally caps, many shared the sentiments of Paul Rabbitt of Rabbitt Analytics in Hermosa Beach, Calif.

The combination of technical, monetary and sentiment indicators is at the most positive level since the March lows, and last week's action should create a capitulation phase, Rabbitt noted.

But "we suggest holding off on new buying," he wrote today. "Any rally in the near term should be considered a bear market rally."

Dave Hunter, chief market strategist at Kelly & Christensen, a small brokerage firm on the floor of the NYSE, expressed a more extreme view.

As reported here in late July, Hunter forecast a substantial late-summer rally that could bring the Comp to as high as 2500 and the Dow to near 12,000 by Labor Day.

In an email yesterday, Hunter suggested the bullish case still could be made based on rising negative sentiment. But the strategist was far less optimistic than in July, suggesting "either we turn here or we are entering a nasty meltdown phase that will exceed the most bearish expectations."

If major averages hold and begin to turn higher this week, a 20% to 25% rally could ensue, he forecast. But if the downturn continues, the Dow could fall to 6000 "at a minimum" and the Nasdaq could tumble to as low as 500.

"In other words, I am quite sure the downside will exceed almost everyone's expectations; I'm just not convinced it happens in a straight line," he concluded.

Bloodied but Unbowed

Previous GuruVisions

Still Bullish After All These Months

What Were They Thinking? Or Were They Thinking at All?

The Market May Be Getting Into an Upbeat Mood

Easy Money: Bullish Gurus Chant Fed, Fed, Fed!

Has This Market Built a Tolerance for Dr. Greenspan's Vaccine?

Joseph and the Amazing Semiconductor Dream Call

Mellow Market on the 'Cutting' Edge

The Market Still Hasn't Found What It's Looking For

Fed Action, Contrarian Indicators Signal Investor Opportunities

Optimistic Bears Belie Talk of Negativity

And the Winner Is...

Finally, anyone expecting Don Hays of Hays Advisory to capitulate after last week's slide will be disappointed to learn he's sticking to his guns.

"Yes, I'm nervous -- but not even close to being ready to throw in the bullish towel," Hays wrote. "In fact, just the opposite. My nervousness is only for the short term and, in fact, my bullish intermediate- and long-term excitement continues to build."

Hays reiterated previously stated faith in the Arms Index and other sentiment signals; these include the CBOE's equity put/call ratio, which closed at 1.01 today, indicating more buying of puts vs. calls. He also suggested that the jobs report, which contributed mightily to Friday's selling, was actually something to take solace in.

In the past 50 years, there have been nine instances when the unemployment rate has risen 1% from its low (Friday's reading of 4.9% being the 10th). The stock market's average one-year return from the last day of the month when that 1% increase was first reported is 24%, Hays reported.

A corollary to this notion that last month's spike in jobless claims is a sign the worst has passed comes from Douglas Cliggott, market strategist at J.P. Morgan.

Between 1960 and 1999, there were five instances when corporate America laid off workers in the face of declining profit margins. On average, the unemployment rate rose 3.7% in those cycles, Cliggott reported. "We still think we could be closer to the bottom than the top end of the substantial increase in the unemployment rate in this cycle," he wrote.

That has Cliggott "very concerned" about corporate profits because "the faster costs are cut, the sooner profit margins bottom and [earnings per share] can start to grow again." Given an expectation for a substantially higher unemployment rate, he's particularly wary of consumer cyclical and consumer finance stocks.

So for most gurus, recent action hasn't provided any reason to change their view on whether investors should be resolutely bullish or steadfastly bearish.