Some Bearish and Bullish Gurus Do a Switcheroo (Cont'd)

GuruVision: Points of Convergence/Divergence

Among those feeling more optimistic these days -- particularly the former bears -- two main factors most commonly cited are the Arms Index and sentiment.

The Arms Index measures oversold/overbought readings by taking a ratio of advancers vs. decliners divided by the ratio of advancing volume vs. declining volume. "The ratio of two ratios," is how Robinson-Humphrey's Robbins described it.

As reported last week, Don Hays of Hays Advisory cited the Arms Index's recent climb above 1.50 as primary evidence a "major bottom" would be established in the coming weeks.

Several other gurus have since cited the Arms Index as supporting their bullish views.

On the sentiment front, Thomas McManus of Banc of America Securities was among those to first note the steep drop in the Market Vane bullish consensus to under 20%. As with the Arms Index, several others have recently joined this chorus.

Another indicator that's gotten a lot of attention is the Chicago Options Exchange Volatility Index, or VIX, which fell 4.9% to 33.19 today. Several observers noted last week the VIX rose to levels not seen since the lows of mid-April 2000, suggesting a similar bounce was in the offing.

On the other hand, Cantor Fitzgerald's Bill Meehan has argued here that the VIX is no longer the bellwether indicator of fear it once was, and advised against reading too much into its recent spike. Without analyzing the veracity of the index, the folks at Schaeffer's Investment Research noted today the VIX failed to close last week above 35; it ended at 34.91.

"This sets up the potential for what we have seen too often in this bear market environment, another spike downward," in the market the newsletter publisher concluded. "These downward spikes have provided extremely short-term buying opportunities, only to be followed by further declines in the market. Caution would therefore be warranted."

Again, it would be untoward to just print the stuff that supports my recently adopted optimism.

Meanwhile, one sticking point on the sentiment front remains the Investors Intelligence survey, where bullishness remains stubbornly above 50%. Last week, bullishness rose to 51.6% from 50.5% while bearishness fell to 30.9% from 32.3%.

Hays offered a rationale for this sentiment conundrum: "Most gurus have been conditioned for so long that you can't sell advisories unless you are bullish, [so] they are afraid to say otherwise," he wrote. Similarly, professional money managers have a mandate to be "fully invested," so it is near impossible for them to express bearishness, or even caution, he observed.

Speaking of Hays, several emailers have recently expressed confusion about whether his recent "major bottom" call means the "third phase" of the bear market has already occurred, or whether he's now expecting an "interlude rally" that presages another downturn.

Well, the answer appears to be a definitive "Yes."

Now that we've got that cleared up...just kidding.

In today's offering Hays reiterated the bullish call from a week ago, citing the aforementioned Arms Index and Fed rate cuts to date, plus expectations for more to come.

But he also said "there are so many economic dislocations in the world that it is almost inconceivable that the problems will be resolved with so little pain."

Also, the veteran market watcher added the "really good times" won't occur again until 2003-2004.

Seeking clarity, I called Hays, who explained he's expecting "significant upside right here" because the "capitulation phase" did just occur. But "the bull market probably won't last too long," he said, suggesting a scenario similar to 1980 when stocks rallied solidly only to succumb to a serious bear market in 1981-82.

Basically, "don't paint yourself in the corner with some fundamental story that you become so obsessed about that you can't shift your investment focus," Hays advised.

Some readers will no doubt accuse Hays of trying to give himself an "out." But the bottom line is investors used to unidirectional markets need to readjust their expectations and time horizons. It does seem highly likely that the road ahead is going to be far less smooth than 1982-1999 was going up and 2000 was heading in the other direction.

To return to the first half of the column, click here. (For a GuruVision primer, check out this story.)

>To order reprints of this article, click here: Reprints