Recent Bears Not Buying Tuesday's Comeback

SAN FRANCISCO -- So much for the aftershock.

After one of the most orderly "panic selloffs" in recent memory yesterday, major proxies overcame their early timidity to end solidly higher today. The Dow Jones Industrial Average rose 0.8%, the S&P 500 gained 1.5% and the Nasdaq Composite added a robust 4.8%.

Catalysts for the advance included a weaker-than-expected retail sales report, which reminded downtrodden investors that the Federal Reserve will ease -- likely by 50 basis points -- when it meets a week from today. Additionally, General Electric (GE Quote) made some positive comments and jumped 6.9%, regaining much of Monday's losses. Finally, tech bellwethers such as Cisco (CSCO Quote), Oracle (ORCL Quote), Sun Microsystems (SUNW Quote) and Juniper Networks (JNPR Quote) enjoyed big percent moves as some investors surmised they had simply become too cheap to ignore. Their gains helped the Nasdaq 100 rally 6.5%.

But, as one might guess, nothing that occurred today changed the hearts or minds of those recently bearish.

"You're going to see rallies in bear markets and declines in bull markets," said Joseph Sunderman, research manager at Schaeffer's Investment Research in Cincinnati. "If you're quick and nimble you can trade those [bear market] rallies, but we'd still be cautious that any rally will be short-lived. The market is going to continue to head south until we see further capitulation."

As reported March 6, Schaeffer's Investment recently adopted a bearish stance on the S&P 500 for the first time since 1987. The firm is "still standing by our bearish posture," Sunderman said today, again citing sentiment as the major driver of that outlook.

Amid heavy losses Friday and Monday, gauges such as put buying, the Chicago Board Options Exchange Volatility Index (VIX) and the Nasdaq 100 Trust Volatility Index rose, but "are still not showing the kind of capitulation we'd like to see at market bottoms," he said.

The VIX, for example, which measures fear via the prices of S&P 100 options, fell 12.5% today, and Sunderman said that, during a bear market, "sharp spikes lower" in the index "are usually signs of a short-term top."

Elsewhere, Kent Engelke, capital markets strategist at Anderson & Strudwick in Richmond, Va., reiterated a target of 1800 for the Nasdaq, adding that the index could hit 1500 in a "waterfall" downturn.

"The same emotion that drove the Nasdaq to 5100, we're now dealing with [the opposite] on the downside," he said today. "We're deep in bear market territory and moving on emotion. The only thing we know for certain is extremes."

Engelke conceded it's impossible to determine a market top or bottom until months after the fact. The things he's really certain of are, one, that an inverted yield curve means the economy is going to slow; and, two, that Fed easing will eventually aid the economy and stocks.

The yield curve will return to a "normal slope" within 90 days, he predicted, as the Fed eases by another 100 basis points before June -- even if only to throw Japan a lifeline. The implication being that the economy will recover sometime by October-November this year, Engelke continued.

Using that assumption -- and recalling that stocks usually start to rebound about halfway through recessions -- stocks should "stabilize" sometime during May or June, he said. Currently, he continues to recommend community banks such as Resource Bank (RBKV Quote), First Community Bancshares and Independent Community Bankshares (ICBX Quote). (Anderson & Strudwick has not done underwriting for the above, but the firm's asset management group has long positions in them.)

An even more draconian outlook comes from Alan Newman, editor of HD Brous & Co.'s Crosscurrents, who said that the S&P 500's close yesterday below the 1205-1210 "consolidation area" that followed the October 1998 bottom is, "in my humble opinion, a guarantee we'll eventually pass the 1998 low around 930 sometime this year."

Newman forecast a "crash" in the Nasdaq in late February 2000 and has remained mainly bearish since. I reported March 6 that he'd forecast a short-term rally but was remiss in reporting his reversal/retraction two days later. That move was spurred by "disturbing" market action and, particularly, the 25% revenue shortfall forecast by Intel (INTC Quote) on March 8.

"This is scary stuff," he said today of Intel's recent warning. "Yet you hear people on CNBC saying 'stay the course'. How dare they? The prevailing attitude is the market will come back. Everyone believes in the long term -- it's a tragedy."

Still, Newman said "decent values" remain, and recommended HRPT Property Trust (HRP Quote), Workflow Management (WORK Quote), Mueller Industries (MLI Quote), Spartech (SEH Quote), Torchmark (TMK Quote) and General Motors (GM Quote).

Despite varying degrees of bearishness, a common theme among the three sources is they all view a short- or even intermediate-term rally as a high probability. They just don't think it's going to stick.

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"It's become apparent that the market is behaving in a way that few anticipated, and the fact that so many have become so unable to get things right is cause for alarm in itself."

Sunderman, Engelke and Newman may not be household names (save, one hopes, for their own households), but I called them after receiving that comment yesterday from a longtime reader. The point is that some folks did get it right (or less wrong than most).

Still, judging by the recent history of Abby Joseph Cohen, the emailer had a salient point when it comes to the best-known and still (??) widely revered Wall Street strategists.

Edward Kerschner, global strategist at UBS Warburg, conceded as much yesterday: "With the economy weak and estimates in freefall, we admit that our preferred approach of trying to construct a bottoms-up, sector-by-sector forecast of S&P earnings does not work," he wrote. "Frankly, it amounts to a pooling of ignorance -- strategists manipulating the estimates of analysts who are following the guidance of managements who are clueless about the near-term course of earnings."

Kudos to Kerschner for that refreshing bit of candor, which accompanied his lowering of S&P 500 earnings-per-share estimates for 2000 to $54.50 from $56.50.

But the moral of this story is not one of contrition from the man who in mid-December stated the market had "reached one of the five most attractive opportunities of the past 20 years."

While Kerschner admitted the error of his recent estimating ways, he concluded that earnings will rebound by more than 10% in 2002 to $61.00. A "strong recovery is in store" for the economy because of the dual efforts of Fed chairman Alan Greenspan and President Bush, he wrote, predicting the S&P 500 will end 2002 at 1835, or 53% higher than today's close.

"Given the failure of us and most other observers to predict the current downturn, why is the forecast of an economic rebound in 2002 credible?" Kerschner asked.

He was being rhetorical. I am not.