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Market Indicators Sending Mixed Signals

Outlook: Analysts continue to watch 'technicals' to see where stock prices may be headed longer term.


Wall Street analysts looking at the stock market's chart patterns and other "technical" indicators say they aren't getting clear signals as to whether the latest sell-off has run its course.

Although pessimism among investment newsletter writers, for example, is on the rise, it remains far below the extreme readings that "contrarian" analysts look for as a sign that the market may have reached a near-term bottom--as it did in mid-September, before rallying strongly in the fourth quarter.

In other words, analysts say there isn't enough evidence that sellers have exhausted themselves, paving the way for buyers to come in and fuel a sustained rally.

"We have not seen true capitulation by investors," said Chris Johnson, an analyst at Schaeffer's Investment Research in Cincinnati. "Across the board, I'm just seeing complacency, not fear."

Said Bob Dickey, managing director at brokerage RBC Dain Rauscher in Minneapolis: "The problem is that technical indicators, just like the fundamental ones, are mixed. You could argue either a bearish or bullish case for the market right now, depending on your point of view."

In technical parlance, the market got "oversold" by last week, after four straight weekly declines in key indexes. That paved the way for a short-term rally that began midday Friday, picked up steam Monday and could continue through this week, experts say.

But analysts still are watching several indicators for stronger signals about where the market may be headed longer term, including:

* Investor sentiment surveys. Technical analysts look to sentiment surveys for signs of extreme bullishness or extreme bearishness among investors. Such extremes often foreshadow a market reversal. In September, bears outnumbered bulls in a weekly survey of market newsletter editors taken by Investors Intelligence newsletter--a rarity that coincided with the market's low after the Sept. 11 attacks.

The latest Investors Intelligence poll results, for the week ended June 7, showed pessimism about U.S. stocks at the highest since Sept. 28. Still, bullish newsletter editors outnumbered bearish ones, 42.9% to 34.7%. (The remainder aren't bullish or bearish but rather expect a modest pullback in stocks from current levels, at worst.)

For market contrarians, those results are headed in the right direction, as the bullish sentiment reading as of June 7 fell 6 percentage points from the previous week.

One survey that may give contrarian analysts more encouragement is the weekly poll of members of the American Assn. of Individual Investors. Last week's results show bearishness outpolling bullishness, 34.6% to 31.8%. In the AAII poll, bullishness is off its recent peak of 56.5% in March, but pessimism is less extreme than it was in mid-September, when the survey showed 26.7% of members bullish and 36.7% bearish.

* Put-call ratio. This compares the number of bearish ("put") stock options to bullish ("call") options bought on the Chicago Board Options Exchange on a given day. Options are contracts that allow an investor to make a leveraged bet on the direction of an underlying stock or index. A put is an option to sell an underlying security at a certain price, and a call is a similar option to buy.

Some technical analysts look for extreme spikes in the put-call ratio as a sign that the market might be oversold and due for at least a short-term bounce. In late September, for example, the CBOE's equity put-call ratio rose to a 52-week high of 1.20. That coincided with the market's bottom.

By late January, after a fourth-quarter stock price run-up, the ratio had fallen to a 52-week low of 0.38 as bearish bets dwindled.

Recently, the ratio has been inching higher, and by Friday it had reached 0.92 (highest since Feb. 15), before backing off to 0.60 on Monday. Last week's levels were seen as encouraging from a contrarian standpoint but far from extreme, analysts said.

* Advance-decline lines. Analysts look at the advance-decline lines on Nasdaq and the New York Stock Exchange to get a snapshot of the market's overall health. The A-D lines are calculated daily as the number of stocks rising minus the number falling. So an upward trend indicates a broad market advance. A downward slope indicates spreading market weakness.

Major market indexes such as the Standard & Poor's 500 and the Nasdaq composite are weighted by market capitalization, meaning the biggest stocks dominate. The A-D lines, by contrast, present an "equally weighted picture" of the market, as Dickey put it.

The A-D lines had been advancing this year until early May, belying the losses in the major indexes. But since early May, the A-D lines have been trending lower, though they remain well above their September lows. Continued deterioration in the A-D lines would be a bearish indicator.

* Trading volume. A spike in equity trading volume late last week, coinciding with the intraday plunge, then sharp recovery in the market averages Friday, was seen as potentially positive by some analysts. That's because bear markets sometimes end with climactic sell-offs.

But the volume trend continued sending mixed signals Monday, analysts said. Bill Ryder, quantitative strategist at Wachovia Securities in Richmond, Va., noted that though Monday's market breadth was impressive, with stocks of varying size, sectors and growth or value characteristics rising, trading volume was modest, especially on Nasdaq. "You'd rather see a much more impressive follow-through kind of rally," Ryder said.

Kevin Marder, L.A.-based market strategist at Ladenburg Thalmann Asset Management, agreed. "There wasn't any urgency [Monday] for investors to jump in there before the train leaves the station," he said.

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