A dramatic swoon in the stock market of late hasn't fazed technical analysts, who continue to believe that the bull market is alive and well. Despite renewed fears about terrorism and questions about the sustainability of economic growth recently, technicians say the action in the market still looks good. And while these forecasters think it's always better to purchase stocks on strength, rather than weakness, they say an opportunity to buy might present itself within the next few weeks. "The market actually looks pretty constructive, all told," said John Bollinger, president of Bollinger Capital. "Technicals remain quite strong." Bollinger said more stocks are making news high right now than new lows, which is typical for a market that's in the process of moving higher. Stocks sold off last week, with the Dow and S&P 500 falling more than 3% each, while the Nasdaq plunged almost 5% amid a dramatic shift in psychology. Although the Nasdaq had been deteriorating since mid-January, the broader market had held up well as investors rotated into more defensive names. But a disappointing report on the labor market ignited fears that the economy could weaken later this year and a terrorist attack in Spain reminded investors that geopolitical risk is a very real concern, sending the entire market lower. While Friday's rebound gave some investors hope, a big slide on Monday quickly squashed any remaining optimism. The Nasdaq slid 2.3% to 1939, while the Dow and S&P lost more than 1% apiece to 10,103 and 1104, respectively. Now that the S&P and Nasdaq have broken through their lows on Thursday, some say further declines could be ahead. The support level for the S&P stands at 1050, representing the index's 200-day moving average, according to Richard Dickson, an analyst at Lowry Research. On the Dow and Nasdaq, support lies at about 9800 and 1870, respectively. Still, Dickson believes that the market should resume its upward trend shortly. Last Thursday, he said, the percentage of stocks trading below their 10-day moving averages fell below 10%. "Every time this happened over the last 14 years, it indicated that the market was either at or very close to a bottom," he said.
Other technical analysts agree that the selling appears to have reached a crescendo. Don Hays, president of Hays Advisory, said the Arms index rose above 2.35 for three consecutive days last week. "This has only happened one other time in history -- on Sept. 14, 1953, the absolute low point of a nine-month stock market decline," he said. The Arms index, or trin, for trading index, is a market indicator that relates advances and declines to volume: (advances/declines/advancing volume/declining volume, with the slash representing divided by). A value greater than 1 suggests more volume is moving into declining issues, while a number below 1 indicates that more volume is heading into advancing issues. Hays said this gauge prompted him to raise his theoretical equity position by 5% last week, though he has not yet bought any new stock. "
T he Dow and S&P 500 could see a slightly lower low," he said. "But the risk from here is low in our opinion." While Smith Barney's chief equity analyst Tobias Levkovich is more bearish on the market overall, he does concede that the recent declines have taken "a degree of froth out of the stock market." In fact, trading volume in over-the-counter stocks declined last month by 16% compared to January, he said. Since March 4, Xilinx ( XLNX), Ciena ( CIEN) and JDS Uniphase ( JDSU), which all have price-to-sales ratios of about 10, have fallen 9%, 11% and 16%, respectively. What's more, volatility has increased sharply and recent surveys have shown receding bullishness among investors. When investors become too optimistic it can be a sign that the market has reached a peak. Meanwhile, liquidity remains strong. M2 money supply has "picked up meaningfully in the last few weeks and the money flows into equity mutual funds are still quite healthy," Levkovich said. Other analysts note that with bond yields so low right now, the Treasury market is providing little competition for capital. To be sure, there are numerous fundamental reasons to be concerned right now, including decelerating earnings, high oil prices and geopolitical uncertainty. Yet technicians remain hopeful. "This is ... not the next step in a sustained move lower," said Dickson. "The bottoming process should last several weeks at most and then the market will try to rally again."