Some bearish conventions were corroborated today, and stocks went along quietly but decidedly lower.

Bearish convention No. 1 was that the five-week rally from Aug. 5 had reignited optimism, or at least complacency.

"Though the doldrums are in full force, there is a familiar pattern unfolding: The markets are weakening a bit, but optimism remains," Phil Erlanger of Erlanger's Squeeze Play commented early today.

Midmorning, Investors Intelligence released its weekly survey of financial newsletter writers, which confirmed Erlanger's point, as bullish sentiment rose to 45.7% from 36.7% a week ago, while bearish sentiment fell to 31.5% from 40.0%.

Last week, the predominance of bears vs. bulls was cited by optimists as evidence of disbelief in the rally's staying power, and thus a contrarian sign. Today's II report invalidated that argument.

Meanwhile, market action seemingly justified those who believed the recent decline in the CBOE Market Volatility Index was indeed a sign of increased bullishness and not due to technical factors, as detailed earlier . The VIX rose 10.7% to 36.23 today as the Dow Jones Industrial Average fell 1.5% to 8694.09 while the S&P 500 shed 1.8% to 917.87 and the Nasdaq Composite lost 2.5% to 1314.38.

Unlike yesterday, Treasuries benefited from the exodus from stocks as the price of the benchmark 10-year note rose 17/32 to 100 9/32, its yield falling to 4.21%.

Bearish convention No. 2 was that the recent rally in tech shares -- the Comp rose 18% from Aug. 5 through Aug. 22 while the Philadelphia Stock Exchange Semiconductor Index rose 25.8% -- was just another bout of speculation by trader types and not based on fundamentals.

More recent action has supported that notion, and tech shares slumped today amid warnings by Nortel ( NT), which fell 15.4%, and Semtech ( SMTC), which lost 25.7%. Cautious comments by Goldman Sachs on Sun Microsystems ( SUNW), down 6.6%, further weighed on tech shares.

Conversely, Hewlett-Packard ( HPQ) rose 0.4% to $14.27 after having traded as low as $13.81 following a Bear Stearns' estimate cut in the wake of its earnings report last night.

The SOX, which began breaking down on Friday and fell 5.9% yesterday following cautious comments by Intel ( INTC), lost another 4.1% today. Among other tech proxies, the Nasdaq 100 shed 3%, the Nasdaq Telecom Index lost 3.4% and the Merrill Lynch High-Tech 100 dropped 3.9%.

Among tech bellwethers, Microsoft ( MSFT) fell 2.9%, below the technically significant $50 level while IBM ( IBM) fell 2.4% and was among the biggest drags on the Dow.

Convention Center

Bearish convention No. 3 is that the corporate malfeasance issue isn't behind us, as stories about Citigroup's ( C) IPO allocations to former WorldCom executives and Merrill Lynch's ( MER) $7 million settlement with disgruntled investors indicate.

Bearish convention No. 4 is that the economy is heading for another fall. No significant U.S. data were reported today, but other big drags on the Dow included economically sensitive names Alcoa ( AA), which was hit by Lehman Brothers' negative report on aluminum prices, and 3M ( MMM). Additionally, a weaker-than-expected report on German business confidence, and ongoing concerns about Brazil and Argentina raised the specter of sluggish global growth.

However, the weak Germany Ifo research institute survey helped the dollar rebound from its recent weakness; the Dollar Index rose 0.38 to 107.22. Additionally, crude futures -- whose recent rise toward $30 threatened the global recovery -- fell 49 cents to $28.34 after the American Petroleum Institute reported larger-than-expected storage data last night. Meanwhile, comments from OPEC sources hinted at increased production, Reuters reported.

Another counterweight to the bearish view on the economy came today from Anirvan Banerji, who opined on RealMoney.com that the Economic Cycle Research Institute's U.S. Long-Leading Index remains well above levels that would indicate a double-dip recession is on the horizon.

About the best answer bulls had to the aforementioned bearish arguments -- and I know there are many others -- was that a holiday-type atmosphere prevailed ahead of the forthcoming Labor Day weekend.

Just over 1.1 billion shares traded on the Big Board today, or 28% below the three-month daily average, according to Bloomberg. About 1.2 billion shares traded over the counter. Declining stocks led advancers by more than 2 to 1 on both exchanges.

"It's thin, it's dead," said one trader, who nevertheless recommended "sell ing every rally you see with reckless abandon."

The source, who requested anonymity due to his firm's compliance regulations, added that "technically, it looks like we've seen the highs and have got to test the lows. We're due for one more swoop down and hopefully we get that and you can start buying for a more substantial" rally.

The trader noted that when senior money managers return from vacation next week they will see those same patterns and the selling will accelerate.

Possible Test Next Week

Whether the July lows will be retested remains very much the subject of debate on Wall Street, as is the issue of how stocks will fare when trading desks start getting back to full force next week.

Phillip Ruffat, director of the futures division at Mizuho Securities USA in Chicago, maintains the bullish posture he recently adopted and does not believe the July lows will be retested.

"There's a little shakeout" and "apathy about doing anything," Ruffat said about today's action, taking comfort that the Dow remains well above its July lows.

Nor does he believe money managers returning from vacation will panic upon their return, noting most are well informed about what's been transpiring.

"Having said that, what happens on Tuesday?" he wondered. "We're not going straight up, because it'll be eight days from Sept. 11."

Ruffat, a self-described "diehard Republican," also expressed concern about the Bush administration's stance toward Iraq. "It sounds to a lot of people like Bush wants this war whether people agree with him or not," he said. "It's a political question mark, but could become a little bit of an issue with respect to markets in general."

Saber-rattling by politicians being yet one more bearish convention to consider.
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.