The Cure for the Summertime Blues

SAN FRANCISCO -- "Sell the rallies" has become the market's new favorite mantra, and was evident again today. Given the recent pattern of aborted rallies, the action wasn't surprising. Nevertheless, a small group of market watchers believes the ever-elusive "Summer Rally" is finally upon us.

Scott Bleier, chief strategist at Prime Charter, noted this afternoon that if the Nasdaq Composite surpasses 2067, it will break the short-term trend line from its May 21 high. (Just pull up a chart and draw a line from May 21 to today's close to see this trend line.) Should the Comp break this downward-sloping pattern, its next technical resistance is at 2150, he said. If that level is surpassed, then the index can rise to as high as 2300, or 13.5% above today's close.

"Nobody believes this rally, but I think we can get there during the month of August," said Bleier, who last Tuesday expressed optimism that major averages had made a successful retest of their July 11 lows.

Today, the Comp traded as high as 2057.10 before closing up 0.5% to 2027.13. Similarly, the Dow Jones Industrial Average closed up 1.2% to 10,522.81 after trading as high as 10,595.05, while the S&P 500 added 0.6% to 1211.23 vs. its intraday best of 1222.74.

The endless deluge of layoff announcements, write-offs and ugly economic reports have created an atmosphere of "depression and misery," Bleier said. The fact very few observers see any catalyst for a rally is the "pre-eminent sign" that one is forthcoming.

Richard Williams, technical analyst at Jefferies, expressed a similarly bullish view in a note today. "The charts suggest that the decline from May 22 may be about to end," he wrote. "The patterns and the quantitative models suggest that the market has more upside before what we call the 'bear market rally of 2001' is over."

Williams suggested the Comp might have one more pullback to 1940 to scare out remaining weak holders. But "now is the time to begin buying," he wrote, forecasting that the index could trade into the 2700-2950 range while the Dow and S&P 500 retest all-time highs.

I know some readers find the idea that markets will rally because of technical factors and/or contrarian indicators unsatisfying (to be kind). Moreover, there was no fundamental reason for today's advance.

The economic data -- notably the consumer confidence and Chicago Purchasing Managers' report -- provided "unmitigated evidence" of the economy's "continued deterioration," said David Orr, chief capital markets economist at First Union in Charlotte, N.C. "It's not a sure thing we're going to sink further into the quicksand, but the numbers today don't provide me with any optimism someone is pulling us out."

Stocks advanced amid hope that the economic data would compel the Federal Reserve to ease aggressively at its next meeting. But the rally faded as the session progressed, perhaps as investors contemplated the fate of prior rallies based on such hopes.

Meanwhile, there's an ongoing debate over whether sentiment really is so bearish to indicate that a rally is at hand. Indicators such as the Investors Intelligence survey suggest otherwise.

But the idea that sentiment is too bullish is "ridiculous," according to Don Hays of Hays Advisory Group in Nashville, Tenn. "Brokers are in the depths of despair [because] clients are frozen at the switch and you can't talk anybody into [buying] anything."

This jibes with anecdotal evidence that July was one of the worst months for retail brokers in the past several years.

Hays couldn't explain why the Investors Intelligence survey continues to show such a high level of bulls, but said it's not an indicator he's ever put a "huge amount of credence in."

Instead, the veteran strategist put more faith in the 15-day average of the Chicago Board Options Exchange equity put/call ratio. The index recently moved above 0.60 and is approaching levels seen prior to recent rallies, such as early January and early April.

Hays does not expect fear indicators to get as high as in late March/early April, but believes "the market won't go up until fear turns to optimism." That process is just beginning, he said, noting improvements in the advance/decline line, new highs vs. new lows and the fact that growth is staring to outperform value. The S&P Barra Growth Index rose 0.9% today vs. a 0.2% gain for its value counterpart.

"That's almost always a side product of people perceiving the economy is doing better," he said. "The market is so obviously improving under the surface but it seems not to be recognized."

Another indicator (to some) of the market's view of the economic outlook is the Dow Jones Transportation Average, which Hays predicts will soon break through recent resistance at 3010. "I do think you will see that move," he said in an interview today. "It's not going to shake the earth, but it will be a forerunner of the Dow industrials making a record high in the weeks ahead."

Another Bull Among Us

Steve Hochberg, co-editor of the Elliott Wave Financial Forecast, has successfully identified several short-term trend shifts in recent months. But his most recent call hasn't worked out so well.

"For me to claim the June 19-21 [Fibonacci turn] window was a success would be like Gary Condit claiming his marriage vows are the most important" thing in his life, Hochberg said today.

Humor and self-criticism aside, that doesn't change the overall message that the decline from May 22 was ending and "a good buying opportunity" is at hand, he said.

The 40-day ARMS Index hit 1.29 on July 24, matching its low of early April, Hochberg noted. Additionally, the S&P 500 futures broke its downtrend line from May 22 of 1211. The futures settled today at 1215.30 after trading as high as 1227.50.

Finally, the S&P's lows on July 11 and July 24 represented a 62% retracement of the gains the index made off the April 3 low, he noted; 62% being a figure Fibonacci devotees consider significant.

"Pattern, price and time suggest a bottom -- or at least suggest the July 24 low was important," Hochberg said. "We're bullish against that low. I like the market here."

Now there's something you don't hear very often these days. But with bull market "heroes" attempting clandestine downward revisions of estimates, maybe the time to be a contrarian is approaching.