Bears Having Their Cake, Risk Eating Crow

The question now is whether the market will follow the litany of gloom or shake it off.
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Christmas, it would seem, has come early for the bears. After eight months of finding mostly coal in their portfolios, the ursine wish list has been fulfilled in recent weeks.

The question is whether the naysayers' celebration will continue, or if the market has already absorbed their best shot.

Certainly, the bears have had much to roar about lately:

The dollar cracks (reprise): The euro rose to an all-time closing high Tuesday and traded as high as $1.1977 intraday Wednesday before retreating in concert with the yen after the Bank of Japan intervened to aid the beleaguered greenback. Given the Federal Reserve's determination to not tighten, plus little relief in federal budget and trade deficits, any near-term bounce in the dollar seems destined to be fleeting.

Commodity prices surge: In part because of the dollar's decline, gold prices have reached their highest levels since early 1996. Gold traded above $400 per ounce overnight Wednesday before retreating to $394.90 in New York amid the dollar's BOJ-generated recovery. Meanwhile, crude prices are hovering just below $33 per barrel, above levels seen in March at the onset of the war in Iraq. Skeptics see gold's rise as a harbinger of inflationary pressures and/or a proxy for the folly of Fed policies. Higher energy prices provide a more obvious and direct threat to the economy.

International investors getting cold feet: The oft-repeated doomsday scenario about dollar weakness leading to an exodus of foreign investors finally got some support this week. The Treasury Department reported foreign investors bought just $5.5 billion of Treasuries in September vs. an average of about $39 billion per month the previous four months. In addition, foreigners sold $6.3 billion of stocks vs. a net purchase of $11.5 billion in August. Finally, overseas investors were net sellers of agency securities in September for the first time in five years.

Whither globalization?: Terrorism and the war against it have already gunked up the gears of international commerce. Japan's Nikkei recently fell below 10,000 for the first time since Oct. 28 following threats by al Qaeda to unleash car-bomb attacks in Tokyo if Japan sends troops to Iraq to support the U.S.-led invasion. Policymakers seem intent on adding even more friction with tariffs and threats thereof. The Bush administration's quotas on Chinese goods is merely the latest salvo in what some fear may turn out to be an all-out trade war.

Scandal, scandal everywhere: More than a dozen mutual fund families and several major Wall Street firms have been implicated, to varying degrees, in the burgeoning investigation over illicit late trading of funds. The arrests of nearly 50 foreign exchange market participants this week provides more fodder for those who believe the entire financial market is a scandal-ridden den of iniquity. (Still, while individual fund families have suffered, overall equity funds enjoyed inflows exceeding $24 billion in October, according to AMG Data.)

Most importantly, the stock market has recently started reacting to these developments. Including Wednesday's modest rebound, the

Dow Jones Industrial Average

and

S&P 500

have fallen in nine of the 12 sessions since hitting multimonth highs on Nov. 3. The

Nasdaq Composite

had fallen in six of the eight sessions since its Nov. 6 closing high. In the process, major averages suffered three reversal sessions -- characterized by higher highs and a lower close than the previous day -- and each fell below its respective 50-day moving average Tuesday, another troubling technical development.

The market, it would seem, is quite vulnerable here. A break of support at S&P 1027 projects a test of support at 1015-1016,

RealMoney.com

contributor Jeff Cooper recently opined. If that fails, the S&P could be on a path to test 995 and, consequently, its simple 200-day moving average just below 960, he wrote.

Bulls and Bears, Oh My

Further aiding the bearish view is the lack of apparent concern among most market participants amid the recent weakness. While the CBOE Market Volatility Index has risen from under 17 on Nov. 12 to Nov. 13 to 19.45 Wednesday -- it traded as high as 20.41 intraday -- it's still very low relative to its recent past. Also, the put/call ratio has remained quite subdued -- failing to eclipse 1.0 this month -- while the Arms Index has had only three sessions above 1.50, and none above 2.

"I think the mood is basically bullish," said Rick Bensignor, chief technical analyst at Morgan Stanley. "People are slightly more aware we haven't progressed from

S&P 1050 but I don't think the market is anticipating a big decline. Most people are holding on to the bullish reins." (Morgan Stanley is expected to release a poll of its largest institutional clients Thursday; expectations are that most remain quite bullish.)

Bensignor, meanwhile, is sticking with his bearish call from

late October, noting that the market has had notable reversals on consecutive Fridays and the S&P has repeatedly failed to sustain progress beyond 1050.

That said, the technician was clearly not ready to declare victory, and argued against the notion the market is at a particularly critical juncture. "All we've done is stalled," he said. "I don't think there will be an easy or quick trade on the downside

because there's too much faith in the upside."

If sentiment is a contrarian indicator, that faith in the upside provides more ammunition for the bears. On the other hand, the market's recent weakness has some skeptics gleeful with anticipation.

"The bear trend is back," one longtime skeptic declared via email after Tuesday's decline. "The

good news

is 2004 will be a bear market with all averages retracing 2003 gains."

A

story here about the Nasdaq's parallel to the postbubble Nikkei and the S&P's similarities to the Dow circa 1987 generated similar sentiments. Recent weakness is consistent with those draconian scenarios, but some readers' apparent zeal to see them come to fruition is striking.

Those hard-core bears ought to note major averages remain well above their 200-day moving averages and have repeatedly bounced since March after testing their 50-day averages. Also, volume hasn't risen dramatically lately, suggesting an absence of heavy selling pressure.

In August, I suggested the market would be

largely unscathed in the historically troubling September-October time frame, but might face upheaval later in the year, a traditionally strong period. That scenario might still come to pass but bears need to seize on their current momentum or risk proving toothless yet again.

To quote the Hebrew sage Hillel: If not now, when?

Change Is Good

Our much-respected bureau chief, John Raess, recently announced plans to leave

TheStreet.com

. For the foreseeable future, I'll be stepping up to his role of editing and leading coverage for our nine-person bureau here in San Francisco. I've been blessed with the opportunity to write for the site on a daily basis for five-plus years but am excited about taking on new challenges.

I plan to work closely with our market reporters in New York -- and all the reporters here in San Francisco -- to help ensure continuity of our coverage. Clearly, I won't be able to write a daily column as I used to. Regardless, I hope to continue to hear from you with your thoughts on the market, questions, insights, etc. One of the best parts of this job is the relationships I've developed with readers and our outside contributors. I certainly hope we can continue the dialogue as I move into this new role.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.