Frustrating Session Fuels the Skeptics

If yesterday was a technical victory for the bulls, today was ... well, something else.

Although the Dow Jones Industrial Average closed with a 0.2% gain and the S&P 500 shed just 0.2%, it was an extremely damaging session, according to Rick Berry, the seemingly ever-bearish technical analyst.

Specifically, the Dow's reversal at today's intraday high of 10,117.54 was critical, because it indicated the index's failure to hold the downtrend line from its recent closing peak of 10,635.25 on March 19, suggested Berry, formerly of Centennial Capital Management in Atlanta and now an independent analyst.

The averages have now "completed [the] snapback rally and have all failed," he continued, suggesting "new reaction lows are coming up."

Michael Paulenoff, founder of 2mStrategies.com, had a slightly different view, suggesting the downtrend line from the March 19 high crossed the Dow's "price axis" at 10,144 today, a level the index never reached. Still, today's session confirmed that the trend of "declining tops" from mid-March "remains intact and dominant," he said.

While the Dow is not the market and the market is not the Dow, the critical point is that the blue-chip index has demonstrated the greatest relative strength of the three major averages. Its breakdown would thus mean it is following the lead of the Nasdaq Composite, rather than pulling it out of a tailspin that continued today, as the Comp fell 2% to 1644.85.

Perhaps more telling than the Comp's decline was the Philadelphia Stock Exchange Semiconductor Index's drop of 4.4% to 504.5. The SOX traded as low as 502.21, just above its Feb. 22 intraday low, and today's close is the lowest since its recent peak on March 8, Paulenoff observed. The SOX's fall came despite the Semiconductor Industry Association's report that global chip sales rose 7.2% in March, the best year-over-year rise in 12 months.

So you have the Dow making a lower high and the SOX making a lower low -- and an inability to benefit from good news -- a technical combination that does not bode well for the bulls.

Meanwhile, Back at the Factories

The market's reaction to today's factory orders data and initial jobless claims data was similarly telling and cautionary, according to Andreas Calianos, head trader at Semiotics Partners.

Factory orders for March exceeded expectations, but the components of the report showed continued weak capital spending by businesses, as reported earlier. Separately, existing jobless claims fell to 418,000 for the week ended April 27 vs. 428,000 (vs. 421,000 originally) the previous week. But the decline was not as big as expected, and continuing claims rose by 84,000, pushing the four-week average to its highest level since February 1983.

"Notice how a smidgen of 'less-than-expected' news pressures this market," Calianos said. "These numbers can be anywhere month to month [and week to week], so why do bulls pull in the horns so fast?"

The trader answered by reiterating a view expressed here Monday: That "denial remains strong" both about the state of the economy and that the bear market isn't over. "Therefore any data point that confirms our suspicion that the worst may not be over, however mild, is precipitous," he continued. "Positive data points -- and there may be some before it's all over -- provoke the opposite response: relief. A brief relief."

Such is the extent of skepticism on Wall Street, there were even potshots taken at one of the day's standout sectors. The AMEX Broker/Dealer Index rose 1.6%, buoyed by positive comments from Salomon Smith Barney about Merrill Lynch (MER Quote), Lehman Brothers (LEH Quote) and Goldman Sachs (GS Quote).

On the one hand, there's the notion that Solomon's optimism is a bit self-serving. Shares of its parent, Citigroup (C Quote), which rose 2.3% today, have been under pressure of late in part because of concerns about probes by regulators into the conduct of sell-side analysts.

On the other hand, the idea that "fixed-income will somehow support the Street until M&A and equities come back" (a particular focus of Solly's optimism about Lehman) is curious, according to one asset-backed trader. "Dealers have been crushed by telecom bonds, accounts don't have appetite [for debt], and you have a yield curve foreboding weakness" in issuance.

Good for the Gander

Still, the negativity expressed above is "good" for stocks, from a contrarian standpoint. The CBOE's equity/put call ratio traded well over 1.25 today before settling at 0.86 vs. 0.72 yesterday. Additionally, the one-day Arms Index rose to 1.57 vs. just 0.62 yesterday. The Nasdaq Arms Index also reached extreme levels of over 3.0. (The Arms Index measures the ratio of advancing issues to declining issues by the ratio of advancing volume to declining volume. This ratio of a ratio is a measure of sentiment -- a contrarian indicator -- and a higher reading is thus considered bullish for stocks.)

At the RealMoney Pro site today, Richard Arms, the index's inventor, suggested the recent back-to-back 2.0 readings for the one-day Arms Index, "the double-deuce", on Friday and Monday, is a particularly rare and extremely bullish signal.

"The implication is that we are likely to see a good deal more upside progress, but not a straight-up move," he wrote. "Some resting and then further, and less dramatic upside movement would be a very strong indication [and] I think that's the likely scenario."

In a subsequent interview, Arms suggested the message of the 10- and 21-day Arms indices are similarly bullish and defended their track records, which have come under question in some circles.

That debate will have to wait. But its very existence suggests (again) a high level of cynicism among many market participants.