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Those who proclaimed a "major bottom" was established on July 23-24 are (once again) wearing dunce caps after Monday's session, as the

Nasdaq Composite

closed below its July intraday low.

More importantly, there's an ominous pattern to these technical patterns. Recall that the Philadelphia Stock Exchange Semiconductor Index's 52-week low on Sept. 17 augured the Comp's breakdown, as

reported here. Similarly, the Comp's technical breakdown Monday indicates similar experiences are now more likely for the

Dow Jones Industrial Average


S&P 500

, even though both closed solidly above their respective July lows of 7532 and 775.68.

The last time the Comp closed as low as it did on Monday was Sept. 12, 1996. On that day, the Dow closed at 5771.90 and the S&P 500 at 671.15. Certainly, the Comp was the epicenter of egregious excess in the late 1990s and is thus suffering more in the aftermath of the bubble.

But the Dow and S&P were not innocent bystanders during those halcyon days. One could argue the Dow and S&P will not follow the Comp's lead back to levels of six years ago, but it's not entirely unthinkable.

Look Out Below

In fact, observers such as Bernie Schaeffer of Schaeffer's Investment Research in Cincinnati are eyeing Dow 6000 or slightly below as the likely area where the


major bottom arrives.

"In the throes of a bear market, the public who is redeeming their mutual funds and bidding up the VIX

CBOE Market Volatility Index to high levels and fearing for the sake of their jobs and the economy is the 'smart money,'" commented Schaeffer on his Web site. "And those smug pundits who five years ago wouldn't have known a VIX from a Twix and who now turn their nose up at the 'dumb panicky public' are -- you got it -- the patsies."

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On Monday, the VIX traded as high as 46.46 before settling up 0.4% to 44.71. At a true "climactic bear market bottom," the VIX will top 100, Schaeffer forecast, noting the index peaked at 172.79 in October 1987. He expects other sentiment indicators, such as the CBOE equity put/call ratio, will reach similar extremes when the bear market truly bottoms.

The point here is not that this development will occur today, tomorrow or next Tuesday. Trading volumes were relatively modest Monday, with 1.35 billion shares traded on the

Big Board

and less than 1.3 billion over the counter. But the lack of overwhelming volume is "good news" only for those investors willing to acknowledge it just means capitulatory selling still may be ahead of us, as discussed


To Schaeffer, the idea that "investor fear equals market bottom" is "a major part of the problem" and why the market hasn't bottomed yet. "In bear markets, investor fear and market volatility and wholesale dumping of stocks are to be expected," he wrote, recalling that the Sept. 21, 2001, bottom was "near absolute" in the minds of many observes. "While such situations can present trading opportunities, they seldom represent the ultimate market bottom."

On a separate but related note, a near-term trading opportunity indeed may present itself soon. But those hoping the

Federal Reserve

will offer any kind of lasting panacea for the market ills at Tuesday's policy meeting need to study recent history more closely.

Other Notes and Notables

One potentially hopeful development from Monday's session is that some heretofore bullish gurus got a little sheepish, while some previously bearish strategists expressed enthusiasm about shares.

Most notable among the bulls was Steve Galbraith, domestic equity strategist at Morgan Stanley, who on Monday lowered his S&P operating earnings estimate to $47.50 from $50 for 2002 and to $55 from $58 for 2003. After entering the year with a 12-month target of 1200 for the S&P 500, Galbraith now has a rolling 12-month target of 1050.

Although fair value relative to government bonds is "north of 1200" in Galbraith's valuation model, "risk aversion will be with us for some time, suggesting lower valuations will hold."

That is a significant admission, considering that less than two weeks ago the strategist argued

stocks were attractive based on historic returns from current valuations.

Near the other end of the bull-bear spectrum, Thomas McManus, equity portfolio strategist at Banc of America Securities, on Monday raised his recommended equity allocation to 65% from 60%, reducing fixed income to 25% from 30%. His recommended cash exposure remains at 10%.

Stocks are becoming more attractive because of the low inflation and interest rate environment, McManus suggested, estimating the "average profitable company" is now trading at a price-to-earnings multiple of less than 16 times consensus earnings estimates for the upcoming 12 months, vs. 21 times as recently as April.

A 16 P/E is not wildly cheap by historic levels. But McManus observed inflation expectations and Treasury yields both were much higher in past eras when P/Es were this low, or slightly lower.

"It is clear that -- individually at least -- stock prices are still vulnerable to downward guidance and negative surprises," McManus wrote. "Despite that vulnerability, we believe investors should prepare to place more of their capital at risk in the stock market." (

To quote the great philosopher Bugs Bunny: "OK bud, you go first."


Two issues subtract from the potential anecdotal optimism one might glean from these developments.

First, Galbraith didn't exactly throw in the bullish towel. On Monday, he reiterated a belief that stocks will produce long-term returns in the 6% to 8% range, although conceded "the bad news is that expected future returns have risen so much because recent prices have fallen so much."

Second, McManus is not the wild bear he once was. Heading into this summer, he sported a recommended equity allocation of just 50%, among the lowest on Wall Street. But on both June 10 and July 15, he added 5% more to his equity weightings. So while McManus has maintained a defensive posture in his sector selections, he hasn't totally sidestepped the market's recent machinations.

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.