Arbeter: Searching for a Bottom

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From Standard & Poor's Equity Research

In just the last week, bearish sentiment has jumped to 51% from 36%, while bullish sentiment has fallen to 36% from 45%. Four weeks ago, bullish sentiment was 55% while bearish sentiment was 26%.

While we think this quick pickup in bearish sentiment is positive, it has not been in place long enough to push 10- and 30-day put/call ratios to levels usually seen near or at intermediate-term lows. One day extremes in sentiment readings are a start, but it takes weeks of these readings for our indicators to turn bullish. In addition, the other investment polls we monitor (II, MarketVane, Consensus) are still tilted towards the bullish camp, so we think they need to flip more to the bearish side before a bottom can be traced out.

The U.S. dollar seemed to finally spook stock investors this week, even though the greenback has been in a fairly sharp decline since the end of August, and has fallen in nine out of the last 10 weeks. With another 1%+ loss this week, we think investors are starting to worry about the speed of the descent, and are concerned about when the carnage may end. One way to prop up your currency is to raise interest rates, something that is not likely in the current economic situation. Another way to at least stop the bleeding from a short term perspective is to have coordinated intervention by central banks. But, there are no signs of that yet.

Technically, the U.S. Dollar Index looks terrible to us, having plunged to all-time lows since August. With no chart support and no trendline support, forecasting a potential bottom becomes very difficult. A trend in motion tends to stay in motion. One Fibonacci tool, based on the width of the counter trend rally during most of 2005, projects a potential low in the 72/73 zone. We note that this is not a forecast for "the" low, just a spot that could see a counter trend rally.

The dollar is extremely oversold on a daily, weekly, and monthly basis, but oversold conditions can last a very long time. In our view, the Fed is now in a bind, because future rate cuts, which are forecasted, will probably hurt the greenback even more. It may also send commodity prices even higher. This is a dangerous game to play, because a run on the dollar could cause panic on the Street. We hope it doesn't reach that point.

Arbeter, a chartered market technician, is chief technical strategist for Standard & Poor's .