Some Bears Got Trapped in the Hunt for the Elusive Bottom

Rarely has the saying, "the market makes fools of us all" been truer. While a rally Friday lifted the Dow by 3.6% and the Nasdaq by nearly 5%, it was in a shortened and sparsely attended session marked by a relatively in-line jobs report and relief that there was no major terrorist incident Thursday.

Considering stocks' harrowing declines in recent weeks, the spurt was too little and too late to keep a great number of erstwhile gurus from looking premature in calls for the market's bottom.

I'm not (just) talking about those longtime bulls who steadfastly declared the Sept. 21 lows -- which both the S&P 500 and Nasdaq Composite violated this week -- were "the lows" and the beginning of a "new bull market." (Folks like Don Hays of Hays Advisory Group who Wednesday recommended doing some "insurance-policy" selling, causing some readers to declare a towel had been thrown. But Hays continues to recommended 100% stocks for aggressive investors (intact since Sept. 26) and declared: "If this is a major bottoming period as I strongly expect, it will be easy to reinvest the proceeds as soon as the momentum of this wave of Nasdaq capitulation runs its course." In other words, the only toweling Hays did was of the sweat on his brow.)

Rather, I'm talking about the growing list of observers who'd previously been defensive, cautious or outright bearish but also got caught trying to pick the bottom. To wit:

Thomas McManus, equity portfolio strategist at Banc of America Securities, who on June 10 raised his recommended equity allocation to 55% from 50%. While 55% is still well below the average of so-called major Wall Street strategists, I suspect McManus regrets the timing of that call, given the S&P 500 fell 7.4% from June 10 through July 3. (McManus didn't return a call seeking comment.)

Morgan Stanley's Barton Biggs, Byron Wien and Steven Galbraith have alternatively talked about "bottoms" and "buying opportunities" since early June. Tuesday, Biggs wrote: "I think the equity markets are in the process of bottoming and stocks should be bought, not sold," while Wien reiterated that his "valuation model indicates the market is 23% undervalued, a level that historically has been a good buying opportunity." (None were available for comment.)

Kenneth Fisher, head of the $12 billion Fisher Investment fund, who recanted a long-held bearish view in mid-May, advising clients to put 100% of assets into stocks. Fisher detailed this newfound optimism in his column in the July 8 issue of Forbes. (Fisher didn't return a call seeking comment.)

Jim Bianco, president of Bianco Research in Barrington, Ill., has lately been talking about bottoms, although more of the short-term tradeable kind vs. long-term bull market variety. Bianco, one of my favorite debunkers of so-called conventional wisdom, has cited factors as varied as the relationship between equity and bond futures to wildly bearish magazine covers. "If Time is looking for the end of the world, what bad news is left to price in?" he mused last week.

Even Woody Dorsey, the Market Semiotics president who made a bold capitulation call in mid-April, started warming up to shares in mid-June. "Naturally, we would have liked to have been just a little more patient, but the turn can still come in a hurry," Dorsey wrote more recently, while reiterating a view July will be a bullish month.

I could go on ... and on and on. A reader recently sent a startlingly long list of bullish comments in recent months by everyone from Richard Arms to Abby Cohen to Doug Kass to Gary B. Smith to Lance Zipper, managing director of trading at Brean Murray Foster Securities. (OK, so I added Zipper for dramatic, alphabetic effect.)

Even yours truly got caught with his hand in the bottom-picking jar, although I never, ever thought the final, ultimate bottom had arrived, as some readers mistakenly surmised. Also, it's really not my job to "call" the market, but to provide insight from those whose job it is and provide (hopefully) thought-provoking commentary.

Long and Wrong ... So Far

All the would-be bottom pickers shared some common views why the market would be, should be, turning:

Valuations -- not in terms of P/E ratios but of stocks' relative attractiveness vs. bond yields, which have tumbled in recent weeks.

The economy (stupid). James Padinha, economic strategist at Arnhold and S. Bleichroeder, recently detailed the "dismal performance" of dismal scientists' prognostications, comparing economists with the George Foreman grill: "You feel like you need one but a few distasteful performances later you're looking to unload it at your next garage sale." Still many stock-pickers are betting on the overriding consensus that the recovery is well under way. Blue Chip Economic Indicators' poll in mid-June showed economists foresee GDP growth of 3.4% in the third-quarter and 3.7% in the fourth, and Padinha believes those forecasts will prove too conservative.

Sentiment: Sure, some sentiment readings remain strangely high, but others have produced levels of fear suggesting a bottom must be near. Remember the "double deuce" signal in the 1-day Arms Index in late April? Wednesday, the VIX traded as high as 35.35 intraday, only its second trade above 35 since Nov. 1.

It Doesn't Go Down In a Straight Line' Theory: All but the most hard core of bears believes stocks could rally at any given moment. Many bottom-pickers expected a bear market rally, which are typically sharp.

What many of the aforementioned missed was that the biggest scandal yet -- WorldCom(WCOME) was still to come and its toxic fallout is still being discovered. Also, many underestimated investors' growing disgust with Wall Street and corporate America, as well as market participants' fears of being long ahead of the holiday weekend (which I hope was safe, relaxing and enjoyable for all).

"How extreme is too extreme?" Bianco said Wednesday. "Where the problem comes in, is we seem to get an apocalyptic story every day. Sentiment is bad and people are bearish -- then you get WorldCom and Xerox (XRX) ... it doesn't stop. If we can get a week without a disaster, the market might have a decent few days."

Perhaps it's too soon to put the dunce cap on the bottom-feeders -- "a year from now it might not be such a bad call," Bianco suggested -- and let's recall they were, collectively, rightly bearish for a long time. Hopefully, this story will provide consolation for those of you distraught at your inability to see the (burning) forest through the trees, as some very successful and respected market watchers shared the same fate.

Conversely, this story should serve as a cautionary tale to those who've been rightly bearish and grown cocksure. The market is a terrificly humbling mechanism, and if it hasn't happened to you yet, that doesn't mean it won't.

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