GuruVision Special: A Wild Week for Hays

SAN FRANCISCO -- As noted in's

Columnist Conversation yesterday and previewed in last night's

regularly scheduled offering, Don Hays of

Hays Advisory

came out swinging with a bullish call yesterday.

But as with a lot of things these days, it's more complicated than it may first appear. The call followed a week that was as wild and unpredictable for followers of Hays' work as it was for the market itself.

Here's a recap:

Last Tuesday, March 13, Hays conceded what was becoming glaringly evident to most: His

interlude rally call was a bust.

The action March 12 violated several of Hays' "lines in the sand" indicators and thus he reduced his recommended equity allocation for "moderate growth" accounts to 50% from 65%, and raised bonds to 38% from 35% and cash to 12% from zero.

In his defense, one could argue that the interlude rally did occur in January, when the Comp rose nearly 25% from its intraday lows of Jan. 3. Perhaps, like many things these days, it got compressed in time -- yet another victim (or evidence of) of the rapid dissemination of information in this age. You could say Hays got the direction right but not the timing. However, critics will say it took him too long to realize or admit that.

On Wednesday, March 14, Hays took it a step further, declaring what many had been suggesting for a while: The "capitulation phase" was already underway.

"I believe the action of the past two days is the opening salvo of the capitulation phase," he wrote Wednesday morning. "This means a major bottom is within the next two weeks but doesn't say how much lower

the market can go."

Given the action at the end of last week, that was a pretty good call.

However, he also wrote the "third phase" of the bear market could last until August and take the

Dow Jones Industrial Average

as low as 7400, the

Nasdaq Composite

as low as 1100 and the

Russell 2000

as low as 280 if each broke respective support levels of 9000, 1800 and 440.

But calling for a bear market lasting until August conflicted with the major-bottom-in-two-weeks call. Hays later conceded getting a lot of calls from confused clients regarding that issue and sought to explain the discrepancy in an interview last Wednesday, as well as in a report to clients on March 15.

Basically, it boiled down to the fact that, on the one hand, the 10-day

Arms Index

was approaching levels that in the past has "always been within two weeks of a major bottom," Hays said. But on the other hand, "the missing link

for capitulation has been the professional investor who has refused to turn even cautious."

Despite recent carnage on Wall Street, the

Investors Intelligence

survey of newsletter writers has remained stubbornly over 50%, although those looking for a correction -- meaning they are short-term bearish but long-term bullish -- has risen.

Which brings up back to the present. Hays based yesterday's bullish call largely on the Arms Index, which moved above the critical 1.50 level on Friday. Developed by Richard Arms, the index shows the relationship between the number of stocks that increase or decrease in price (advancing/declining issues) and the volume associated with stocks that increase or decrease in price (advancing/declining volume).

In 11 of the 12 instances the index has previously reached 1.50 (or higher), it was followed by "a significant upward move in the next few weeks -- or months," Hays wrote yesterday. "I now believe the end of the capitulation phase could be as early as

Monday and as late as one month from now."

That said, he cautioned against plunging into the market based on the Arms Index or any other indicator, writing "there is no guarantee that this will work."

Rather than signaling it's time to buy with both hands and feet, the Arms Index is signaling investors should "focus

their full attention on the bullish forces that are building under the surface."

Another of those forces is the

Federal Reserve,

from which Hays expects 75 basis points of easing at Tuesday's meeting. "With the Japanese situation also so tenuous, I suspect that will help to motivate

Alan Greenspan's

generosity," he wrote. "Just maybe this will be the catalyst that will be used to kick off the rally."

Speaking of rallies, for reasons to be explained in a forthcoming column, I too have started to become more bullish on equities than any time since

late May 2000 (prior to a pretty solid rally, you'll recall). At the time, I'd just returned from my honeymoon. Given I've just gotten back from a long weekend in New Orleans, perhaps going away is the answer to what some say is my curmudgeonly outlook on the market.

That said, I'll echo the same points as Hays, who is "taking it one day at a time" and is "not saying that I expect a return to the kind of runaway bullish Nasdaq markets of 1998-2000."

If that's unsatisfactory or sounds like a cop-out to some readers, so be it. I will note that Hays' piece Monday contained more qualifiers than any I can recall from the veteran strategist, perhaps reflecting the (

dare I say it?

) humbling he -- among many market participants -- has endured in recent months.

"Right now more than any time I can recall there are a lot of failures and embarrassments," Sam Ginzburg, senior managing director of equity trading at


, said in an interview last week. "It's making people start to question themselves. Nobody knows what's going on. There's so much uncertainty -- expect the unexpected. The key is to get through the cycle" and live to trade another day.

Ginzburg was talking about the general milieu on Wall Street and not Hays in particular, but the point remains germane.

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.