Beware the ides of March, indeed.

In contrast to its indecisive coyness two weeks ago, the stock market has exhibited clarity of purpose in recent days. To state the obvious, the market's near-term trend has turned decidedly negative.

But even if Wednesday's sharp declines augur more weakness, it's premature to declare the 16-month-old bull market dead (even if hardcore bears will gladly make that case).

After closing below its 50-day moving average on Tuesday for the first time since Nov. 21, the Dow Jones Industrials tumbled 1.5% Wednesday, breaking near-term support at 10,375 and ending at its lowest level since Dec. 19. The Nasdaq Composite, which turned negative for the year Tuesday, retreated further from the much-ballyhooed 2000 level, ending at its lowest point since Dec. 22. The S&P 500 also shed 1.5% in a session that confirmed weakness that has been building steadily in recent weeks.

Wednesday was a "particularly important break," according to Woody Dorsey, president of Market Semiotics in Castleton, Vt., who sagely predicted a "March massacre" for stocks one month ago. "You've seen a mood shift and change in risk appetites, which are the most important things to initiate a correction."

While declaring "this could get nastier" and that's there's an "outside risk" the recent bull market has ended, Dorsey believes the market will make a low "within three or four weeks" and rally sharply thereafter.

"The market will rebound," he said. "The bigger message is that after virtually a one-way market for the last year, now we're going to get into a different kind of market, a two-way, more tactical market."

John Bollinger, president of Bollinger Capital Management in Manhattan Beach, Calif., offered a similar, albeit more outwardly optimistic, view.

"We're going through a normal correction and you often get washouts at the end" of those, he said. "I don't see any real technical damage being done."

Whether Wednesday qualifies as a true washout is debatable. Volume was heavy and breadth decidedly negative, but neither rose dramatically from recent levels while new 52-week highs exceeded new lows by a wide margin in both Big Board and over-the-counter trading. Downside volume was 85% of the NYSE total and 68% of Nasdaq volume, well shy of the 90% level often seen at important bottoms.

In a controversial statement, Bollinger decried the "huge amounts of panic" that have greeted the recent decline, suggesting the anguish that recent weakness has generated is a signal the decline is closer to its end than its beginning. "People are really freaked and apparently thought they were entitled to a golden road to unlimited devotion," he said, i.e., a never-ending rally.

Bollinger conceded any panic he's seen is purely anecdotal. Further anecdotal evidence includes The Wall Street Journal's much-discussed "signs of a peak" story on Tuesday, and Wednesday's joint CNBC appearance by mega-bears Robert Precther, president and CEO of Elliot Wave International in Atlanta, and Arch Crawford, editor and publisher of Crawford Perspectives.

In a nutshell, such anecdotes suggest Bollinger has a point. On the other hand, quantitative measures of fear (or lack thereof), suggest concern is rising, but from egregiously low levels in some cases:

  • The CBOE Market Volatility Index rose 12.5% Wednesday but remains at a relatively tepid 18.67;
  • The equity-only put/call ratio slid to 0.63, from Tuesday's close of 0.81;
  • ChartCraft.com's Investor's Intelligence survey showed bullish sentiment declined to 56.1% in the latest week from 59.4% a week prior. Bearish sentiment rose to 20.4% from 18%. It was the second consecutive week that bullish sentiment declined, while the third consecutive week that bearish sentiment rose;
  • The 1-day Arms Index presented the most dramatic evidence of fear. The indicator eclipsed 2.0 for a second straight day Wednesday, a rare development that hadn't occurred since November 2002, although it actually slid to 2.50 from 2.83 on Tuesday. (Also know as the TRIN, the Arms Index compares the number of rising stocks to the number of declining stocks at a given time and simultaneously relates that comparison to advancing and declining volume.)
  • Fundamentals Matter

    I've focused on technical indicators here because I believe what's occurring is largely a technically driven correction.

    Heading into this week, neither the Dow nor S&P had suffered even a 5% correction since March 2003, which is highly unusual given the rally's duration.

    Supply and demand is also a technical factor: Although equity mutual fund inflows (i.e., demand) have been strong, so has the supply of stock, be it from secondary offerings by companies such as General Electric and Juniper Networks, or the recent spate of initial public offerings , including Wednesday's offering from Chinese wireless firm TOM Online ( TOMO).

    On the fundamentals front, Friday's employment report was clearly a wakeup call for the eternal optimists, as is the accompanying steep decline in Treasury yields.

    At sub-3.75%, the 10-year's yield is certainly not saying the economy is strong, at least on the surface. But robust buying by foreign central banks (reinvesting dollars they buy to keep their own currencies from rising too much) and hedging by mortgage-backed investors have given a big boost to Treasury prices, putting downward pressure on yields.

    What's really at stake here is not how the economy is currently faring -- save for the prickly issue of jobs, it remains strong -- but whether financial markets are starting to detect weakness ahead, a hotly debated issue for sure.

    I believe a big tell will be what Americans do with the larger-than-normal tax refunds many will get this spring. If folks spend the money (as most economists expect and incumbent politicians hope), the economy will get another government-sponsored boost through summertime, and perhaps Alan Greenspan's gamble that consumer spending will keep the economy afloat until corporate spending revives in full will pay off.

    But if Americans keep the wallets on the hip, it'll show how hurting/worried people are and could augur an ugly second half of 2004.
    Aaron L. Task writes frequently 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 atask@thestreet.com.