Technicians see Wall Street selling wave before rebound
By Chelsea Emery
Wednesday July 3, 2:33 pm Eastern Time
Reuters Company News
NEW YORK, July 3 (Reuters) - It's not over yet.
That's what technical analysts with deep experience in charting stock market behavior are saying.
Even though stocks have plummeted to multiyear lows, the final "capitulation," a flurry of selling that clears out the remaining excesses from the late 1990s bubble, hasn't happened. And that, they say, means stocks likely have further to fall.
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"At some point there will be a capitulation and it will be dramatic, where we'll see 4 billion shares traded or some big drop," said Stephen Bliss, co-head of Nasdaq trading for Cantor Fitzgerald. "It'll be something to wash everyone out."
The good news is that this panic selling is usually followed by sustainable gains. That's because sellers are finally done dumping shares and there is nowhere to go but up.
But that time hasn't arrived, strategists and traders say, despite rapid declines in the last few days that have sent the stock market reeling and the technology-laden Nasdaq composite index (NasdaqSC:^IXIC - News) plunging to five-year lows.
"I'd love for us to get washed out, but it doesn't seem we're there -- we need two times as much volume," said Matt Ruane, head of listed trading for Gerard Klauer Mattison. "We're not going to get it in a holiday week, though."
Other sure signs of capitulation include sharp declines in benchmark indexes, combined with a high reading of Wall Street's "fear gauge," which measures how jittery stock investors are.
Strategists also will look for market surveys to show higher bearish sentiment and an increase in the put-call ratio, a measure of how many traders are betting stocks to fall.
"We are at the point where we are seeing selling at any price, but not at a level to say capitulation has taken place," said Charles Reinhard, senior U.S. investment strategist at Lehman Brothers.
Some say that if capitulation takes place, it will happen in the next few weeks, throughout the quarterly earnings season, when many companies are expected to report sluggish profit growth.
THE GOOD NEWS
Not everyone believes stocks must suffer a capitulation phase before they move higher, but many rely on the washout to create a bottom in share prices. It's worked before.
In 1998, when markets were roiled globally by the near collapse of hedge fund Long-Term Capital Management, the S&P 500 hit tumbled heavily, dropping to the year's lows on volume of more than 1.15 billion shares -- more than twice the average daily volume, according to Reinhard. Markets then soared to new highs by December.
"I don't think that will happen this time around, because we're so much lower, but it's not inconceivable," said Reinhard.
But the bad news is that capitulation has not yet occurred, according to traditional measures. To be sure, volume is strong -- the Nasdaq had its most-active day so far this year last Monday, with more than 3 billion shares traded, after WorldCom Inc. (NasdaqNM:WCOME - News) said it overstated financial results by billions.
And Wall Street's fear gauge is rising but has not yet hit the panic levels that usually signal a bear market bottom. Professional investors measure investor insecurity by looking at the Chicago Board Options Exchange's Market Volatility Index (CBOE:^VIX - News). The VIX measures the implied volatility of the U.S. equity market, or how much up or down investors expect the market to go.
The index, which spiked to a high of just over 57 on Sept. 21 during the post-attack trading week, is at 34.8, up just slightly from the 34.4 last week, despite the recent stock market declines.
A capitulation level is set between 40 and 60, according to Robin Griffiths, chief technical strategist at HSBC Securities.
TECHNICALS DON'T SUGGEST CAPITULATION
And finally, the equity put/call ratio, which shows the level of investors betting on further declines against those who speculate stocks will rise, is still below panic levels. Currently the CBOE's ratio is pinned at 0.91, meaning there are still more bets that stocks will rise than fall.
"We like to see it over one," said Richard Dickson, a technical analyst for Hilliard Lyons
To be sure, some say investors do not have to capitulate before the market turns around. Confidence could be restored over time without such a shakeout.
"I don't think we're going to have to see a big selloff," said Kevin Connellan, head of trading for Northern Trust. "I don't see us going much lower and we're flirting with the bottom. It's just inconceivable that all these companies have accounting irregularities."
Still, market bears say there's no real reason to push confidence much higher. The second quarter earnings season is bringing another round of dismal profit outlooks from sector bellwethers including Advanced Micro Devices Inc.(NYSE:AMD - News), which cut its sales forecast for the second time in two weeks on Wednesday amid a slump in the personal computer market and stiff competition.
""Market confidence is lower given corporate irregularities and the war against terrorism," said Reinhard. "There are some who don't want to stick around to watch the next shoe drop -- the fear is this market has more shoes than Imelda Marcos." (LOL!)
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