Signs of a Stock Market Bottom?

S&P technical strategist cheers up after a close look at the numbers.

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It's a headline-driven world on Wall Street at the moment, with the slowing economy and financial sector troubles sucking up most of the oxygen around stocks. With worrisome fundamentals like those, you would have to be a pretty big risk taker to plunge new money into the stock market, right?

Maybe not. If you look beneath the scary headlines and examine the broad market's price action and trading pattern, there are some encouraging signs that the worst could be over. Mark Arbeter, Standard & Poor's chief technical strategist, is a little less anxiety ridden than most market watchers right now. If some recent trends continue, he says, an end to this market correction may be near.

For the S&P 500 to really start a reversal, Arbeter says, it needs to hold its January lows of around 1270 without sinking much lower. After bouncing back from 1273 on Monday to 1298 Wednesday, that seems to be happening. To make the reversal stick, the S&P needs to climb back up to recent highs of around 1395 and entice more institutional buyers to come back to stocks. If that happens, the bulls are officially running. "Then you can say the worst is over," Arbeter says.

Until that happens, the S&P chartist points to two other trends to watch for signs of a turn in the market:

The first is investor sentiment. It's horrible at the moment. Take this contrarian example: Investment Intelligence's weekly poll of investment newsletter writers looks absolutely depressing, and that may be a buy signal. Bearish sentiment on its index is 13.8 percentage points greater than bullish sentiment. It's the largest spread since October 2002, smack in the middle of the last bear market. "It's a tremendous sign, because so far this correction has been half of what it was back then," Arbeter says. "We've gotten very bearish without as much price deterioration."

Second, fewer stocks are closing at new 52-week lows. On January 22, when the S&P hit an intraday low around 1270, the number of new lows set on the New York Stock Exchange and the Nasdaq totaled 1,865. On Monday, when the 1270 level was tested, 1,236 stocks hit new lows, according to S&P. "It tells me the internal makeup of the market is improving. That's something under the radar screen you don't see just by watching the indexes," Arbeter says, noting that sort of divergence often precedes a market bottom.

Also, in a note Wednesday Merrill Lynch points out that for the second Tuesday in a row, 90 percent of all stocks were up and 90 percent of total volume was up. In the near term at least, that's a cheerful rebuttal to the S&P 500's downtrend. Unfortunately, by the end of Wednesday, Tuesday's rate-cut inspired 420-point surge in the Dow looked short lived. The Dow gave back 293 points, dipping back to 12,099. The S&P shed 2.43 to 1298.

That, says Justin Walters, an analyst at Bespoke Investments, is perilously close to the 1250 level on the S&P that would put stocks in a solidly bear market, with the S&P down 20 percent from its peak. From there, the next move would most likely be another drop. "We're not out of the woods yet," he says.


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  • Kirk Shinkle

    Kirk Shinkle is a senior editor for U.S. News Money and manages the Best Funds portal. Follow him on Twitter @KirkS or email him at kshinkle@usnews.com.