Stocks Withstand Today's Bad News

There was plenty for the cynics today, but the bulls could be forgiven for feeling uplifted. At least they could be following today's regular-hours session, but there wasn't much encouragement for the optimists in the post-close news.

Yes, major averages failed to sustain early gains and couldn't benefit from positive economic data, namely the better-than-expected housing starts data and tame Consumer Price Index report. Yes, the semiconductor sector's key barameter, SOX, closed down 1.6% to 441.97 after trading as high as 462.83. The chip sector's early gains reflected anticipation of tonight's book-to-bill ratio. Yes, IBM (IBM Quote) fell 1.6% after a downgrade by Morgan Stanley. Yes, Best Buy (BBY Quote) tumbled 7.7% after the company said its second-quarter results will be below analysts' estimates and amid concerns about a burgeoning price war with Circuit City (CC Quote), which lost 1.4%.

And, yes, trading volumes remained meek, with breadth slightly positive in Big Board activity while losers edged out decliners in over-the-counter trading.

But in finishing mixed with very minor moves, major averages overcame a host of potential negatives, including another suicide bombing in Israel, renewed weakness in the dollar, and worries that yesterday's advance would prove to be yet another false dawn. Particularly impressive was the stock market's ability to ignore the latest slide in the greenback, which traded at a 17-month low vs. the sterling while the euro approached last week's 17-month high of 95.23 cents before closing at 95.08 cents.

Certainly, major averages reflected the countervailing forces at work today. The Dow Jones Industrial Average rose 0.2%, the S&P 500 gained 0.1%, and the Nasdaq Composite shed 0.7%.

The point is, investors have been anything but balanced in assessing the news of late, and today's session might indicate the worst is over, at least for now. That is the view of Woody Dorsey, president of Market Semiotics in Casleton, Vt.

Capitulation Caller Warms Up to Equities

"The willingness of participants to assume risk is what reverses markets," Dorsey said today, referring to the "animal spirits" cited by John Maynard Keynes. "The pessimism is being reversed by better price behavior. We are turning up."

Notably, Dorsey is no permabull who's been encouraging investors to buy dips throughout the recent market thrashing. Quite the opposite.

Back on April 17, I reported on a bold capitulation call by the newsletter writer and devotee of behavioral economics. "There's great potential this [capitulation] could unfold in the next couple of months, possibly the next four to six weeks," he said at the time. A week later, Dorsey reiterated the capitulation call, suggesting "if it occurs, is likely sooner rather than later."

Since April 17, the Dow was down 5.2% heading into today's session, while the S&P 500 was off 8% and the Comp by 14%. More importantly, perhaps, the S&P and Comp traded at their lowest levels since late September, while sector indices such as the Amex Biotech Index and Nasdaq 100 did violate their September lows.

Whether or not the action of the past two months represents capitulation has been the subject of much debate. Either way, it does seem to have fit Dorsey's criteria, as well as a more recent forecast that the selling would continue into early June before giving way to a significant summer rally.

"This low may be a stopping place in an ongoing capitulation process, but it still looks like a good low," Dorsey said today, expressing particular optimism for biotech, pharmaceutical and semiconductor stocks. "The market seems to have bottomed and should follow through with our idea of an up July and eventual trading high in August."

Dorsey suggested the "summer rally may be grudging at first" and forecast that it will be followed by a "classic Fall fall" before a "much better 2003."

Initially, the positive sentiment from today's session was carrying over into after-hours trading. Oracle (ORCL Quote) posted fourth-quarter earnings that met expectations, and revenue that bested estimates. Oracle shares surged initially in after-hours trading but have more recently tempered those gains as the company didn't give guidance for the full year during its conference call and said fiscal first-quarter results will be 2 cents below consensus.

Elsewhere, postclose warnings by Advanced Micro Devices (AMD Quote), Ciena(CIEN Quote) and Apple Computer (AAPL Quote) were further subduing any enthusiasm generated by today's session.

As of 6 p.m. EDT, S&P futures were down to 1039.90 in Globex trading vs. their pit-traded settlement of 1044.20. Similarly, Nasdaq 100 futures were down to 1143 vs. their settlement of 1170.

Other Naysayers Say Nay

Some other recent skeptics, however, are less eager than Dorsey to jump on the rally brigade.

"I think this is just a bear market bounce. It's expiration week and [the market] got oversold in nearly every short-term technical measure," said Steve Hochberg, co-editor of the Elliot Wave Financial Forecast in Atlanta. Hochberg was presciently dismissive of any "bottom" talk when we last spoke on June 7.

In Elliott Wave parlance, the market is in the third wave down of a five-wave decline from the March 19 highs, he said today. The third wave is the longest and strongest of the waves, and "I don't think it's ended," Hochberg continued. "It wouldn't be out of the realm to see this up [to] 1050 to 1060 on the S&P or even a little higher. But you should not get anywhere close to the May 17 highs" of 1106.59 for the S&P and 10,353.08 for the Dow.

A move above those levels would suggest "my wave count is wrong," he continued, but as long as those highs aren't breached, the market "remains within a bearish pattern."

Elsewhere, Kevin Depew, a technical analyst at Dorsey Wright & Associates in Richmond, Va. (which has no connection to Woody Dorsey), said nothing has transpired to change the firm's defensive stance, reported here on June 4.

The bullish percentage indicators favored by Dorsey Wright & Associates are "still saying things are decidedly defensive," Depew said, noting NYSE bullish percent actually fell yesterday despite the big rally for major averages. (The NYSE bullish percentage indicator was created by A.W. Cohen in 1955 and is calculated by dividing the number of NYSE stocks trading on new point-and-figure buy signals by the total listed on the exchange.)

"There's nothing to suggest we're about to go into a full-fledged offensive mode," Depew added. Still, he observed the percent of NYSE stocks trading above their 10-week moving averages has fallen from 74% in April to 28% recently, indicating the market is "approaching technically oversold levels from which we could expect a bounce."

A bounce is not a 'major bottom' nor the beginning of a new bull market. But hardcore skeptics and individuals who've recent embraced short selling should take heed. Even some observers who remain long-term bears are sensing a change in the wind, at least for now.