The September lows take on more importance because they were very close to the lows seen in October, 1998, and therefore represent the bottom of two important bear markets. The closing low for the "500" in October, 1998, was 956.44, while the Nasdaq close was 1419.10. Since the lows in 1998, institutions have come back into the market with a vengeance whenever the "500" got into the mid-900s area and when the Nasdaq has fallen to the low-1400s zone.
While an entire retracement of the advance since 1998 is almost complete, wiping out the entire gains of that bull-leg, the indexes have also given back quite a bit of their gains since the major low in December, 1994. The low reached that month was the launching point for the greatest 5-year stock market run since at least the late 1920s. A 50% retracement of the advance since the low in December, 1994, comes in at 986.46 for the S&P 500. Incredibly, the Nasdaq has given up over 80% of its historic rise since 1994. These retracements, in conjunction with the fact that the indexes have fallen back to or are approaching long-term trendlines drawn off the 1982 lows, suggest that the excesses of the great bull-run have been wrung-out. While there is no guarantee that the market will hold at the September lows and at these long-term trendlines, it is too early to start calling for anything worse.
The recent weakness has taken its toll on many groups that were providing market leadership. The small-cap indexes (S&P 600, Russell 2000) have rolled over, breaking their intermediate-term uptrends. At the same time, many of the beaten-down telecom and technology stocks have fallen to new lows. It will take time for the majority of stocks to base and repair their charts before a new, sustainable advance can begin.
Sentiment remains mixed despite the constant weakness, and certainly does not reflect the recent price action and overwhelmingly poor company news. The Investors Intelligence poll of newsletter writers, remains way too bullish with 49% bulls and only 31% bears. CBOE put/call ratios have moved to levels associated with market bottoms, but overall option volume remains well below average.
As we have said recently, the very reliable 4-year cycle is due to bottom this year. Looking at major lows historically, most have occurred during the third or fourth quarter. So we still believe the final low of this bear market will happen later this year. With the summer months here, trading volumes will slow, and will be insufficient to propel the market to outsized gains. Arbeter is chief technical analyst for Standard & Poor's