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Have stocks hit bottom?

THE BALTIMORE SUN

IT CAN take weeks or months before investors realize they are in a bear market rather than a short-term correction.

Just as tricky to gauge, if not more so, is when a bear market is in retreat. Each bear market has its own characteristics, experts say, so the signs that the worst is over may change from one downturn to the next.

Even professional market watchers, who continually look for clues of recovery, may not be able to say with any confidence that the bottom has been hit until months after it's happened.

"You can't determine the bottom without hindsight," says Jeff Hirsch, chief executive officer of the Hirsch Organization in New Jersey, which publishes the "Stock Trader's Almanac."

Generally, a bear market is a decline in stock prices of 20 percent or more from a peak over a long period. Some have a more liberal definition.

"It's more of an issue of mood than anything else," says Aswath Damodaran, a finance professor at New York University.

For example, during the bull market, Damodaran listened to people brag about their stock picks as he rode the train from his home in New Jersey to work in New York. In the bear market, he says, "nobody wants to talk about their stocks, or when they do, it's in a morbid tone."

The market has improved in recent weeks. Still, the technology-heavy Nasdaq composite index remains deep in bear market territory, down 58 percent from its closing high in March 2000.

The Standard & Poor's 500 Index has extracted itself from the bear's claws and is off 18 percent from its high last year. And the Dow Jones industrial average, which narrowly escaped closing at bear level in March, is down nearly 8 percent from its high in 2000.

Despite improvement, experts don't agree on what it means.

"The signals are very mixed," says Mickey Misera, head of equity capital markets at First Union Securities in Baltimore. "The question everyone is asking: Are we emerging from a bear market or are we just having a rally in a bear market?"

Misera says he thinks it's the latter, although he believes the market is close to the bottom.

Of course, investors are best off not trying to time ups or downs in the market because they are unlikely to consistently get it right.

"The majority of market return comes from a fairly small number of trading days. If you just miss a few big days, your returns are appreciably lower than with a buy- and-hold strategy," says Pat Dorsey, director of stock analysis for Morningstar, a financial research firm in Chicago.

Still, if investors are looking for signs that their stock market pain may be nearing an end, experts say these are some of the signals that a bear market may be on its way out:

Investors throwing in the towel, leading to a massive sell-off, sometimes called capitulation.

"People are indiscriminate in the price they are willing to accept to get out of a position. They just want out," says Chuck Lieberman, chief economist and chief investment strategist for Advisors Financial Center in Suffern, N.Y.

After that, the theory goes, the market has only one place to go: up.

Higher trading volume than usual on days the market is up, says Misera. "For it to be meaningful, you probably need a month's worth of accelerated volume to indicate that customer interest in the market is starting to come back," he says. Typically, trading volume would pick up in larger cap stocks, then spread to small-cap equities, he says.

The exodus out of stock market funds stops and money from cash-like investments starts pouring into the funds, Misera says. Tied to higher trading volume, this, too, is "a barometer of investor confidence," he says.

Advancers outpacing decliners, or a greater number of stocks whose prices go up than down over a period. A favorable sign is advancers outnumbering decliners on the New York Stock Exchange by 2-to-1 or 3-to-1 over days or weeks, Hirsch says.

Bad news loses its ability to send stock prices falling, says Al Goldman, chief market strategist with A.G. Edwards & Sons in St. Louis. That happened recently, he says, when the market rebounded from a brief dip after news of rising unemployment in April.

"The mood among investors had changed. We had gone from the glass is empty to the glass is half-full," says Goldman, who says the market hit bottom in March.

Professionals begin covering their short positions. Investors who sell stocks short are betting that prices will fall. Basically, they borrow shares from a broker and sell them, agreeing to replace the stock later.

If stock prices fall, these investors can buy the cheaper shares, return them to the broker and pocket a profit. If prices rise, investors end up having to buy more expensive shares and take a loss.

"Short-sellers are often regarded as some of the savviest market players" and tend to do more research because of their potential for high losses, Dorsey says.

When professional short-sellers begin covering their short positions, or buying shares to replace those borrowed, they are basically saying they don't think stocks will go down any further, Dorsey says.

The put-call ratio favors puts. Investors buy puts - options to sell a stock for a set price by a certain date - as a hedge against falling prices. They buy calls - options to buy shares at a certain price by a specified date - when prices are expected to rise.

"When you get more puts than calls, that means everyone is freaking out and scared of the market, and that's the bottom," says Hirsch.

The V- or U-shaped "bottom." If you chart the performance of a market index that continually goes up a few days and then down a few days, you'll see a zig-zag pattern over time. But an index that falls sharply and then immediately rebounds will appear V-shaped. Or, an index that falls quickly and remains flat for a while before climbing will develop a U-shaped pattern.

A V- or U-shaped pattern indicates a sustained rally, a sign that the worst may be over, says Bharat Jain, a finance professor at Towson University. The drawback, though, is that you can't clearly see these shapes until well after the bottom has occurred, he adds.

Do you have a personal finance issue of general interest that you would like to see addressed in this column? Contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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