Bears' Hibernation Coming to a Close

Investors could have a case of the seven-year itch.

The last bear market for stocks began seven years ago, but since then, the Dow Transports and the Nasdaq Composite have had a great run. Despite the ongoing love affair with the bull market, investors now have a chance to cheat, just as the bears will likely be emerging from hibernation in March.

Back in March 2000, technology was the only place to be. That hype has since been replaced by the ideas that housing has bottomed and that tons of corn must be transported to ethanol refineries to solve our energy problems. Neither will be happening any time soon.

Comparing the Monthly Charts

Next month, the Dow Jones Transportation Average could complete its journey to my semiannual resistance at 5280 and then return to my quarterly pivot at 4693. That's not a stretch when you consider that the transports began the year at 4560.

The Dow Jones Transportation Average The transports traded between 2261 and 2763 in March 2000

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Source: Reuters

The question is whether the Nasdaq can match the range of the transports of seven years ago. So far this year, the tech-heavy index has been restrained by my annual pivot at 2483, but it held 2483 at the low last Friday. This sets the stage for a rally to my semiannual resistance at 2544. I don't know whether the Nasdaq can surge to my second semiannual resistance at 2912, but a test of quarterly support at 2272 seems more likely, given the fundamentals.

The Nasdaq Composite This index traded between 4355 and 5132 in March 2000

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Source: Reuters

Fundamental Concerns

So what are the bears worried about from a fundamental standpoint?

Last week's economic data show an economy tending toward weakness:

• Retail sales were below expectations.
• Industrial production and capacity utilization declined.
• Initial jobless claims popped.
• The Philly Fed report was weaker than expected.
• All week long, we saw reports of layoffs, from auto workers to chocolate makers.

If this trend continues, I see an ease on down the road, as a weaker-than-expected economy will trump inflation.

In the aftermath of Federal Reserve Chairman Ben Bernanke's testimony on Capitol Hill, the media noted that the FOMC would hike rates if the economy is stronger than expected and inflation accelerates. But we also know that the FOMC will cut rates if the economy weakens and job stability falters. That is its stated dual mandate. As the year progresses, I believe the latter scenario looks more likely than the former.

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Richard Suttmeier is the chief market strategist for RightSide.com, where he writes the Small Stocks and Sector Report. Early in his career, he became the first long bond trader for Bache and later began the government bond department at LF Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the U.S. capital markets. He has also been the U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback; click here to email him.