10 Stocks for the Cockeyed Optimist

Through the end of last week, for every two stocks that were up this year, another three were down. Among the major companies in the S&P 500, 213 were up for the year and 287 had fallen.

These stats may seem unexceptional when you see that the S&P 500 is down 4.3% in 2004, but they're relevant because they helps us understand whether stocks today are merely in a soft patch of a bull market that started in spring 2003 or have actually resumed the great millennial bear market.

The latter is probably the case, unfortunately. But before holding a wake for stocks, let's back up a moment and see how we got into this mess.

Three weeks ago, I reported that the broad market's behavior through the end of the third week of July would probably provide a strong signal for its direction for the rest of the summer and fall. At the time, the S&P 500 and Dow Jones Industrial Average happened to be resting just below their 200-day moving averages, the usual dividing line between intermediate-term bull and bear markets. They were also sitting just above their 200-week moving averages, a dividing line between longer-term bull and bear markets. There was still a chance that low prices would generate enough buying enthusiasm among investors to push the indices back into bull territory.

Running Out of Ammo

When higher crude oil prices two weeks ago and lower national job-growth figures last week conspired to dent shareholders' faith in the potential for stronger second-half economic growth, however, investors unloaded a lot more stocks than they bought. And that selling shoved the indices well below both their 200-day and 200-week moving averages into bear territory.

Many big players in the market, such as long-only mutual funds, love to see a high-volume breakdown like that. They believe panicky selling gives them a chance to buy great stocks cheaply. But other big players, such as opportunistic hedge funds, are trend-followers, and they will see a major breakdown like the one that occurred last week as an opportunity to make money by pushing stocks even lower.