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Stocks fluctuate lower after Merck deal

March 10, 2009|Tom Petruno

Even in the worst bear markets, stocks are supposed to bounce periodically.

Monday, however, brought no sign of a bounce, as the major stock indexes lost at least 1% after tumbling 6% or more last week.

Things have gotten so bad this year, both in terms of the depth of the market's losses and investor pessimism, that many Wall Street pros say a significant rebound must be imminent.

The numbers are mind-bogglingly awful. Consider: The Dow Jones industrials are down 25% year to date, by far the worst start to any year back to 1900, according to Bespoke Investment Group.

Enough, already? One forecaster saying that is Robert Prechter of Elliott Wave International. Notoriously bearish over the years, he advised clients late last month to close out "short" positions (bets on lower prices).

"We see a huge bear-market rally coming," said Steve Hochberg, chief market analyst at Prechter's firm in Gainesville, Ga. The expected rebound, he said, would provide a chance for investors who haven't sold stocks to do so.

In other words, Prechter is no bull. In fact, Hochberg said, the firm believes that after a short-term bounce, the market will resume its decline -- and that blue-chip indexes might not bottom until they've dropped as much as they did in the 1929-32 plunge. The Standard & Poor's 500 index lost 86% of its value in that catastrophic decline.

The S&P is down 57% from its October 2007 all-time high.

Another mega-bear, Felix Zulauf of Zulauf Asset Management in Switzerland, tells Barron's magazine in the current issue that the global economy is in a "depression environment" that he sees giving way to a decade of economic stagnation, at best.

Nonetheless, the market is overdue for a snap-back, Zulauf says. He thinks the S&P index could surge 25% to 40% in the next two to four months before resuming its plunge.

Analysts' hopes for at least a short-term rebound are based in large part on technical factors. For one, with investor pessimism so high, the market may be running out of sellers -- because so many already have sold, or so it would seem.

A weekly survey of investor sentiment by the American Assn. of Individual Investors showed 70.3% were bearish last week, the highest level in the history of the survey, back to the mid-1980s.

Also, any spark of good news -- say, details of the long-awaited plan by the Obama administration to deal with rotting loans on bank balance sheets -- could drive more short-sellers to cover their bets. That would entail buying shares to replace the stock they had borrowed and sold, betting on lower prices.

A rally fueled by short-sellers could quickly pull in traders looking to ride any updraft. Fundamentals-minded investors who think stocks finally are cheap enough also might climb aboard at that point.

Still, just because the charts say so doesn't mean the market is obligated to bounce soon.

"We think we're in the 'grind' stage of this bear market," said Ryan Detrick, an analyst at Schaeffer's Investment Research in Cincinnati. "For a lot of people, it's too late to sell, but also too early to buy."

In this environment, he said, the market may continue to fall because of investor "resignation, perhaps even boredom" rather than because of a massive new wave of selling.

History hasn't been of much use in predicting what would happen to stocks in this downtrend, Detrick noted: "This bear market has thrown everything out the window."

Among Monday's market highlights:

* The Dow slumped 79.89 points, or 1.2%, to 6,547.05. The Standard & Poor's 500 index slid 1%, and the Nasdaq composite index dropped 2%.

* Financial stocks rebounded. An index of bank shares rose 5.3% after tumbling 23% last week.

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tom.petruno@latimes.com

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