SAN FRANCISCO -- With all the talk of September's cruel history and tax-loss selling (although little discussion of what gains exist to be offset), the gloom was palpable as trading resumed today after the holiday weekend.
But a stronger-than-expected National Association of Purchasing Management survey quickly changed the market's outlook, at least for a few hours. But major averages suffered a wicked late-day selloff that left the
Dow Jones Industrial Average
up 0.5% to 9997.49 after trading as high as 10,182.38. The
shed 0.1% to 1132.94 after trading as high as 1155.47, while the
shed 1.9% to 1770.89 vs. its intraday best of 1836.19.
Given the market's recent past, a few hours are unlikely to sway many investors that better times are afoot. Still, the early action was no doubt comforting to those who, seemingly against reason, remain steadfastly optimistic.
In separate interviews and/or writings late last week and today, Don Hays of Hays Advisory, Steve Hochberg, co-editor of the
Elliot Wave Financial Forecast
and Dr. Harry Schiller, editor of the
Short-Term Consensus Hotline
, each expressed continued faith that higher prices are imminent; this, despite each making
similar calls in recent months at higher-than-current levels. The heralded "retest" of the market's lows hit in late March/early April may yet occur, our stubbornly bullish trio concedes. But they each believe the levels will hold -- or only marginally break -- and be followed by substantial gains.
Although many readers strongly disagree with the viewpoint, our steadfast threesome (among others) retains the bullish faith largely because major averages have yet to trade below those spring lows.
"The key in my estimation is the March 22 low in the Dow of 9106," Hochberg wrote in an email Friday. "The index would have to break this low in order to invalidate the 'buy' signal by the TRIN. Until and unless this happens, one should be bullish."
The TRIN, also known as the Arms Index, gauges market sentiment by measuring the ratio of advancing stocks to declining issues by the ratio of advancing volume to declining volume.
controversy has arisen recently about the value of the Arms Index, Hays and Hochberg, particularly, expressed continued faith in its ability to pinpoint moments of extreme pessimism or optimism.
Last Wednesday and Thursday, the one-day Arms Index rose above 2.0, a level historically indicating extreme pessimism. Last week marked the first time such readings have occurred on back-to-back trading days since Oct. 16 and Oct. 19, 1987, Hochberg reported. The time before that was Aug. 3-4, 1982 -- another key turning point.
Arguments that the TRIN has become "meaningless" because of the rising number of closed-end funds and preferred stocks on the
are "intellectually intriguing," Hochberg conceded. "However, there is not one single instance over the past 40 years that supports the 'contaminated' theory," including the market's spring lows, which the Arms Index identified. "The back-to-back closes above 2.0 tell us that a significant market low should be days away."
Recent activity in the moving average of the 10-day Arms Index was a pillar to Hays'
effusive bullishness on Aug. 22.
"I am still confident of the classic bullish readings being given by the Arms Index," he reiterated today. Hays noted the 15-week equity put/call ratio is confirming that signal and argued that that the CBOE Volatility Index (VIX), which isn't at particularly extreme levels, is a "good indicator" but "not a benchmark."
On Friday, he conceded to being concerned about the market but "not even close to abandoning my very bullish approach. No, it has not gone up nearly as quickly nor as much as I would have expected. But that does not do anything to destroy the bullish story."
The market's failure to cooperate is reflected in the unaudited year-to-date performance of Hays' long-term growth accounts, which were down 10.1% through Aug. 30. His moderate growth accounts were down 7.1%. (For the three years ending June 2001, his managed accounts are up 14% before fees.)
Those year-to-date performances best the S&P 500 but are nothing to be proud of, and Hays isn't.
Trading Is Easy
Hays' accounts may be down year to date, but Schiller claimed his mutual fund "switching" accounts were up over 7% year-to-date through Thursday's close. The performance was fostered by a 50% weighting in small-caps via the
Rydex Mekros fund, plus a strategy of "buy
ing when the market gets whacked, and trading out of positions" when it rallies, he explained Friday.
The market has been "rough for buy and hold" investors but "not traders who expect rallies to fail and expect selloffs to be met by a rally," Schiller declared. "Buy dips and sell rallies -- it's easy as riding a bike."
While he is also watching the March/April lows of the major averages, Schiller said the key level supporting his current optimism is 1126-27 on the S&P 500 futures, which the market hit on March 22, April 4 and April 6. It did so again on Friday, when the futures traded as low as 1127.50 before bouncing.
If this sounds familiar -- as it did to me -- it's because Schiller expressed similar views back on
Aug. 9 and
July 18, albeit about erstwhile support at higher levels.
But he claimed to have used those points as keys for short-term trading decisions, not long-term investments.
Schiller said he'd be a seller if the S&P futures reach into the 1150s, noting 1158 was the market's summer "breakdown point." Conversely, a break of 1081 would suggest that the "trading range thesis" has been violated, he said. Today, the futures settled at 1131 after trading as high as 1158.
I will try to be more vigilant in the future, but for those feeling frustrated because I didn't report on Schiller's past "sell" calls, may I humbly suggest you subscribe to his services (www.harryschiller.com). For any "guru" who piques your interest, the only way to get the complete, unfiltered story is straight from the source. This column aims to be a thought-provoking starting point for investment decisions, not the end game.
That disclaimer and still-problematic fundamentals notwithstanding, the pick here is there's more potential for short-term gains vs. a resumption of the downward cascade. Should a rally emerge, appropriately positioned traders would benefit. But there's a risk sidelined long-term investors might be seduced back into the market for yet another bloodletting. Unless, of course, the unapologetic bullish forecasters confound the skeptics.
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.