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All Market Has to Fear Is Lack of Fear Itself

Recent selloffs have been fairly orderly, which signals to some that the big blowoff is yet to come.

On paper, the selloff-snapback Wall Street saw over the past two sessions was almost textbook.

There was the big drop Friday, the weak bounce Tuesday morning and then fresh declines that brought in real buyers. Writ large, it is the rhythm of greed and fear that sustained the bull market for the past five years, a jagged move higher in which every time stocks run too fast, sellers come in, setting off a decline that shakes out the weak holders and brings the market down to levels where real investors come into the market. And the process begins anew.

But to think that the action over the last couple of days is enough to correct the excesses and the imbalances of the market is probably a mistake.

A Little Too Orderly?
The S&P 500's Course on Friday

Source: Reuters

Though on paper, Friday's selloff, with its nearly 300-point decline in the

Dow Jones Industrial Average

and 3% drops in the

Nasdaq Composite


S&P 500

, sure looked like a bloodletting, the selling was incredibly orderly -- so much so that one could easily lay a ruler along an intraday chart of the action. It lacked anything of the fear that technicians like to see before they pronounce a market's troubles over -- as was the case with earlier drops this year.

Unfinished Business

"The problem is the last few pullbacks we've seen have been lame," says Bob Dickey, managing director of technical analysis at

Dain Rauscher Wessels

. "That's caused people to be so complacent that nobody's surprised, nobody's reacting, nobody's scared."

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Some trace the market's current troubles back to stocks' decline this October, a selloff they believe was incomplete -- and trace back to the same old lack-of-fear problem. The October 1999 drop really didn't have anything of the capitulative sense to it that the 1998 and 1997 experiences had.

"While skepticism increased, it really wasn't excessive in October," says Steve Shobin, chief technical analyst at

Lehman Brothers

. As a result, market leadership didn't get dismantled like it did in the two previous years -- a precondition for the broad rallies that followed. "That is probably one of the reasons 73% of the

S&P 100

stocks are down since July," Shobin reckons.

It may be that for the market to get out of its rut, what didn't happen in October will have to happen now: The tech highfliers will have to get taken out back and roughed up. There are people who think that's what's coming down the pike. More than any specific index level, "that will probably be your best clue as to when the market hits bottom," says Dickey.

Taking a Beating

If it does pan out that way, nontech stocks may be fairly well insulated -- if only because they've pretty much had the stuffing knocked out of them already. More than 70% of the stocks in the S&P 500 are 20% or more below their 52-week highs.

"If you exclude the techs and the Internets and the biotechs, the market is fairly valued -- and in some cases undervalued," says Stanley Nabi, chief investment officer at

DLJ Investment Management

. "So we don't need to go into a sustained market downturn." Instead, Nabi thinks that there will be a meaningful correction in tech followed by a broad market advance.

That would be the classical resolution to a market with poor breadth. But this may not be a classical market -- particularly with the

Federal Reserve

raising interest rates. With little debt and an earnings stream that will probably continue to grow even if the economy slows, technology may be the least rate-sensitive sector in the market. Just as in October, investors may continue to view dips as a reason to buy tech, and little else -- leaving a market that is, because of its poor breadth, considered inherently unhealthy.

But also the only market we have.