After some brief and minor early gains Tuesday morning, stock proxies turned sour and were violating some key technical levels of late, specifically 10,000 for the


, 1075-1080 for the

S&P 500

, and 1650 for the

Nasdaq Composite.

In large part, the early weakness was due to factors evident

last week, including heightened prospects for war between India and Pakistan, renewed weakness in the dollar and some uninspiring economic data, most notably the expectations component of today's

consumer confidence report. Concerns about earnings prospects for big-caps such as


(INTC) - Get Report


Home Depot

(HD) - Get Report

were also weighing on stock proxies.

Also similar to last week, trading volume was muted while weakness in stocks and the greenback were proving a boon to gold and related shares. The price of gold was lately up 1.1% to $324.30 per ounce, its highest level since October 1999, while the Philadelphia Stock Exchange Gold & Silver Index was up 1.6%.

The early action got me thinking about a conversation I had Friday afternoon with Woody Dorsey, president of Market Semiotics, who was in town visiting clients.

Dorsey, you may recall, made a bold and daring

capitulation call in mid-April, as reported here. More recently, however, he has been writing about prospects for a "summer rally," prompting me to ask if he felt that capitulation had already occurred. There were a few nasty days in early May, but I didn't think that qualified as any kind of panic selloff, and Dorsey agreed.

"The best thing would be for the market to sell off importantly, i.e., make new lows, which would draw risk appetite back into the market once a sense

emerged we'd seen the worst," he said in a follow-up conversation today. "Very often does that

coincide with dramatic moves that rubberstamp a price extreme,

but we haven't seen that kind of behavior since last September."

However, he argued the preconditions for such a development remain at hand, suggesting that will prove to be a prelude to a "great summer rally," albeit one that ultimately will prove to be a bear market rally.

Dorsey fancies himself an expert in "behavioral market diagnosis," and focuses on what he calls the "mind, mood and body" of the market, i.e., the psychology, dominant concepts (fundamentals) and price action.

Starting with the last, price action, he said the lack of follow-through to the rally the week of May 13 suggests "that was just a short-covering rally and nothing has changed conceptually and dynamically. Therefore, the market has to go down some more." The market's weakness Friday and again today reflect the somewhat obvious, but crucial, notion that "the market is still in trouble here," he said.

As for the dominant concepts, Dorsey said that scandals involving accounting, brokerages and the Catholic Church, as well as the terrorist crisis are "self-reinforcing and make people apathetic about buying stocks." He also observed people are seemingly more

concerned about terrorism today vs. the immediate aftermath of Sept. 11, when the prevailing message was for investors to "be a good American" and buy stocks. (I still contend that was

bad advice, but if buying stocks for "patriotic reason" was a good idea in September, isn't it equally so now?)

Furthermore, he mused about the "viral propagation of concepts" that occur at market tops and bottoms, comparing the current environment to the height of the dot-com bubble when all the dominant presumptions were bullish for stocks, most notably the widespread belief in a so-called New Economy.

As for market psychology, Dorsey relies on his own sentiment indicators, which are compiled via daily polling of various market participants. "You don't have historic levels

of pessimism, but clearly people are somewhat disenchanted with the stock market," he said.

The sentiment issue is clearly convoluted. The level of bullishness in the American Association of Individual Investors fell to 26.2% last week, but bulls remained more than 50% (53.1% to be specific) in the

Investors Intelligence

poll. Put buying has risen, but not to extreme levels; today, the CBOE equity put/call ratio had risen as high as 1.19 but was lately at 0.79.

Meanwhile, the CBOE Market Volatility Index has remained notably low vs. its recent past, although it was up 7% to 22.61 as of 1:30 p.m. EDT.

Despite conflicting signals from various indicators, "there's a general aura of disenchantment with the market," Dorsey said, about which there is little dispute. "It could be the stock market bottoms and the VIX doesn't go to 40, it doesn't have to."

Looking ahead, the newsletter writer said two or three days of "extreme negativity" would be typical for a market approaching a bottom. Usually, such episodes are accompanied by an "acute situation that develops over a short period of time," such as a bankruptcy of a major company or global situation, he said. "A stigma people can glom onto."

Without forecasting what the trigger will be, Dorsey observed "the dollar is now becoming the latest thing the market is fixated on, although it's been going down for a few months."

Earlier today, the euro reached an eight-month high of 0.9309 cents, although the dollar was holding up better vs. the yen. The dollar index June futures, which measures the greenback's strength vs. a basket of other currencies, was recently quoted at 112.18 vs. Friday's settlement of 113.10.

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

Aaron L. Task.