Watching for the Wonderful Washout

Finally, it's here! A big nasty flush-out, hopefully on strong volume, that shakes out the last of the weak hands. It's exactly what has been needed to put the fear of God into the bulls, and (overly) embolden the bears.

This is precisely what this market has been missing since 2005 started. After a sizzling fourth quarter, the rally from the August lows faltered, and then got worse. The year-opening market malaise has led to a selloff that's given the bulls a winter chill. Blame oil, earnings nervousness, a tightening Fed and an overheated end to 2004 for the recent buyers' strike.

And it has been a buyers' strike, rather than a distributive top. We see evidence of that in the volume data, as well as how broadly the market participates when it's moving higher. If this were a typical end to a bull run, we would see some narrowing of the market, with fewer stocks joining in on any rallies.

But that's not what's occurred. The rally off of the bottom has enjoyed widespread participation by both value and growth stocks, with small-cap, mid-cap and large-cap issues all taking part, although some sectors and market capitalizations more than others.

It's not all completely ugly. There are a few factors to provide some warmth to those betting this market still has some upside left in it. Starting from the March 2003 lows, I believe we are in the 7th inning of a cyclical bull move within a secular bear market. That suggests there is still more upside to be had over the next three to six months. But because of where we are in this timeline, your entry point becomes much more crucial than it has been in the past.

---

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].