Market Does the Limbo: How Low Can It Go?

It was another rough session for equities, yet some market participants can't help trying to call a bottom -- again.

The Dow Jones Industrial Average closed down 1.1% to 9007.75 after having traded as low as 8960.54. But some claimed technical victory as the Dow remained above 9000, which it hasn't closed below since Oct. 2.

Similarly, the S&P 500 closed down 2.1% to 948.09, below its Sept. 21 closing low of 965.80 but above that day's intraday low of 944.75. The Nasdaq Composite violated its Sept. 21 intraday low of 1387.06 but did not break its Oct. 8, 1998 intraday low of 1343.87, closing down 3.3% to 1357.85.

As I wrote last week, recent history has shown major averages making a series of lower lows amid a seemingly inevitable trek toward the September lows and beyond. The implication being that the S&P -- and eventually the Dow -- will soon follow the Comp's lead.

Still it's my job to report both sides of the story: As was the case last week, there was talk today of the S&P having "successfully retested" its September lows and the Comp having created a "double-bottom" with its October 1998 lows, from whence, of course, the real blowoff gains commenced.

"Bear markets don't last forever, and this one is getting long in the tooth," said Steve Massocca, president of Pacific Growth Equities in San Francisco. "I'm not saying it turns tomorrow, but it's an opportune time to start buying. We're due for a bear market rally."

Massocca noted the 10% spike in the CBOE's Market Volatility Index -- which closed at its highest level since Nov. 1 -- and the stabilization of the dollar as factors in his belief that it's a prudent time to buy shares.

In fairness, the trader is buying "smaller companies that are less popular and where valuations are attractive" (although he wouldn't specify) vs. the "big-cap tech and more popular names that are not exactly cheap. I wouldn't buy the" Nasdaq 100 Trust (QQQ), which fell 3.6% today.

A host of smaller-cap names trading below cash values suggests that "institutional accounts are throwing in the towel," he said. The Russell 2000 fell 3.3% to 432.84 today, its lowest close since Oct. 31. The S&P SmallCap 600 also fell 3.3%, while the S&P MidCap 400 shed 3%.

Massocca conceded the seemingly unending barrage of accounting concerns -- today's coming from Vivendi Universal (V), which fell 21% -- and realizations that expectations for the second half were too rosy -- Salomon Smith Barney's downgrade of National Semiconductor (NSM), which fell 16.8%, being today's prime example -- will continue to weigh on shares in the near term.

"Trading-wise, momentum is clearly down, [but] "smart guys are buying here," he said. "For those with a time horizon longer than an hour and a half," he said, there's more opportunity from the long side vs. the short side.

That may very well prove true, but such attitudes explain why we still haven't gotten the full-blown capitulation that many observers believe would be healthy: Many participants remain more fearful of missing out on the next rally than of suffering additional losses.

"Most investors still appear concerned about capital appreciation and the prospect of missing the turn in the market when they probably should be more concerned about capital preservation," Richard Bernstein, chief U.S. strategist at Merrill Lynch wrote yesterday.

Such notions are by no means limited to retail investors: Portfolio managers are "the most bullish they have ever been," he noted, citing the results of a recent survey by Ed Hyman's ISI Group. Meanwhile, Bernstein's proprietary sell-side indicator , though down to 67.1% on June 28 vs. 69.1% in late May, suggests "Wall Street strategists continue to believe that the current environment represents one of the best times to buy equities in the past 16 to 17 years."

Yesterday, Bernstein lowered his 12-month S&P 500 target to 1050 from 1200 but maintained a recommended asset allocation of 50% stocks, 30% bonds and 20% cash. Cash has now outperformed the S&P 500 for 55 months, he noted, expressing amazement that "investors refuse to seriously consider cash as an investment. A measly 1.7% return from three-month T-bills is still a better return than the negative returns stocks have been providing."

Toil and Trouble

An apt follow-up to yesterday's piece about the history of other post-bubble eras comes today from Donald Straszheim, president of Straszheim Global Advisors in Santa Monica, Calif.

During the Dow's bubble of the 1920s, the Nikkei 225's bubble in the 1980s and the Comp's bubble in the late 1990s, "there was a great payoff in each case during the run-up to suspending your investment discipline and enjoying the ride," Straszheim wrote.

In the 1920s the telephone and the automobile were comparable to the Internet and other life-altering technologies of the 1990s. In the 1980s, Japan's economic management theories were a version of the so-called New Economy theories that many investors would eagerly embrace as gospel. "Nonparticipants were punished via the opportunity cost of poor relative performance by not going along," he continued.

But of course, "those who did not get out at the right time were punished -- and punished severely" in each of those equity market manias, Straszheim wrote.

After peaking in 1929 at 381, the Dow took 25 years to get back to that level. Japan's Nikkei remains 73% below its peak of 38,915, reached on Dec. 29, 1989. The Comp entered today at 71% below its March 2000 peak, and of the three indices, it had the steepest spike in the final stage of its ascent.

"Was the ride worth it?" Straszheim asked. "Only if you were smart enough to make it just a one-way ride."

Now, equity investors appear to be holding a one-way ticket to Palookaville..

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