Markets' Path Lacks Signs of Strength

In the wake of Friday's woeful ending to a troubling week, many market participants were expecting major moves today. Some feared a cataclysmic downturn while others expected a robust rebound.

As is so often the case, the market was doing its best to frustrate the greatest number of participants, producing neither a wildly bullish nor bearish scenario (at least so far, as stocks were weakening as the day progressed).

At mid-afternoon the

Dow Jones Industrial Average

was down 0.62% to 9849, the

S&P 500

was down 0.96% to 1066, and the

Nasdaq Composite

was down 1.25% to 1643.

But the relative quiet of U.S. equity proxies masked some dramatic developments elsewhere. Namely, gold hitting an intraday best of $312 per ounce (a two-year high) while the dollar hit new multimonth lows vs. both the euro and yen.

The dollar's weakness and gold's strength abated by midday, but the trend should be disconcerting to those who are long stocks and/or hoping for a big bounce.

"Troubling as last week's stock market action was, the most disturbing occurrence was the dollar's decline, as it fell both below its 200-day and 50-day" moving averages, based on the Dollar Index June futures, said Jeffrey Saut, chief equity strategist at Raymond James. The action signals "a potential major top in the greenback, which would further complicate the stock market's situation, although could be beneficial to" U.S.-based multinationals.

Noting that equity valuations remain high, Saut continues to believe "the best we can envision is a trading range environment in which a lot of 'sexy stocks' will have difficulty."

The dollar's dip was also noted by John Roque, senior analyst at Arnhold & S. Bleichroeder (and occasional

RealMoney.com

contributor), who commented today: "A strong currency is paramount, essential, vital and crucial to stock market health, and a weak

dollar is a major impediment to improved equity conditions."

Roque said "last week's action went a long way toward showing that the emperor is very naked. And from what we saw, he could spend a little more time in the gym and cut his toenails, too."

Wise-cracking aside, the technician believes gold and gold stocks "will work higher" despite being short-term overbought, and noted the Dow, S&P and Nasdaq Composite broke critical support levels at 10,000, 1100 (and today its Feb. 20 intraday low of 1074.36), and 1724 (as well as 1697), respectively, last week. Furthermore, downside volume exceeded 70% of total volume in over-the-counter trading for the 26th time this year. Conversely, upside volume has exceeded 70% on of the total on only half as many sessions.

"The continued onslaught of downside volume dominance says there's still a ton of tech stock for sale," he wrote.

Finally, while agreeing that short-term momentum indicators suggest the market is "oversold," Roque noted that 46% of stocks in the S&P 500, 58% of the S&P 500 and 67% of the S&P 600 are trading above their 50-day moving averages. Market internals will remain overbought until all three move under 40%, he argued.

A similar conclusion (via different methodology) was reached by Alan Newman, editor of H.D. Brous & Co.'s

CrossCurrents

, who had forecast a "substantial correction" back on

April 8.

"We got the test

of the S&P's February lows, but no expansion in pessimism at all," he observed. "Even as the odds for a short-term turn rise, we see very limited upside possibilities until most folks show proper respect for the bear case."

Though bullishness in the

Investor's Intelligence

survey fell to 52.7% last week from 54.8%, Newman called the latest level "gloat territory." He suggested "the continued optimism of advisers gives us more confidence that a full-scale test of the September lows is in the cards for later this year."

Among other sentiment indicators, the VIX rose 6.9% on Friday, but it remains at low levels relative to recent history. Additionally, despite talk of retail investors "abandoning" the market, equity mutual funds had net inflows of $29.28 billion in March vs. $5.4 billion in February, the Investment Company Institute reported.

Newman didn't cite the ICI data, which was just released this morning, but has long argued any talk of investor "capitulation" is nonsensical until there are sustained outflows from equity mutual funds. No argument here.

Regarding specific stocks, Newman's short recommendations include

AOL Time Warner

(AOL)

, which continued its recent decline today. Other short positions include

Household International

(HI) - Get Report

and

Capital One Financial

(COF) - Get Report

. Along with

Providian Financial

( PVN) and

American Express

(AXP) - Get Report

, both credit card issuers were down this morning, apparently hurt by a

report in

USA Today

about rising delinquencies and late payments by "less affluent" card holders.

Timing Not on His Side

To varying degrees, Saut, Roque and Newman have each been cautious on U.S. equities for some time now. Perhaps more noteworthy is that last week's action caused at least one previously bullish market watcher to reverse course.

After the close of trading Friday, James Rohrbach of

Investment Models

in Orlando issued a "sell signal" on the Nasdaq, reversing a buy call issued on March 4. He maintains a "buy" recommendation on the NYSE, intact since Oct. 10.

From March 4 through Friday's close, the Nasdaq fell 10.5%. But Rohrbach's work is designed to avoid big declines, so this "sell" call suggests more losses may be forthcoming.

"This market continues to be sick, and it continues to take money away from investors," Rohrbach said. "The economy is improving and the markets are sinking. I guess we have to take what the dealer gives us, but I don't like these cards."

Conversely, Don Hays of Hays Advisory continues to push the "baby bull" thesis, despite having recently capitulated on his

short-term rally call.

"I'm disappointed with Thursday's and Friday's market, but the

bullish signs are still there," Hays wrote today, citing Friday's spike in the one-day Arms Index, recent action in the equity put/call ratio (11 of 20 trading days over 70%) and the continued outperformance of new 52-week highs vs. new lows. "The upside potential both on the short- and long-term appears to be intact."

I note this mainly because I receive more email requests for updates about Hays than about any other "guru." Emails from fans and Hays-bashers alike, that is.

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.