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Stocks overdue for a rally? Even some mega-bears say so

March 8, 2009 | 10:10 pm

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

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 industrial average is down 24.5% year to date, the absolute worst start to any year going back to 1900, according to market research firm Bespoke Investment Group.

Measuring from Dec. 31 through March 6, the next-worst start to any year was the 11.8% drop in 1920 -- not even close to where we are today.

Enough, already? One market forecaster in that camp is Robert Prechter of Elliott Wave International, who has been notoriously bearish over the years. Late last month he advised clients to close out "short" positions (bets on lower prices).

Thescream_2 "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 an opportunity for battered 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 1929-1932 plunge. The Standard & Poor's 500 index lost 86% of its value in that catastrophic decline.

With last week's sell-off, the S&P is down 56% 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" for the time being, which 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 resurge 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. (Yes, chart voodoo.) 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, 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 decline because of investor "resignation, perhaps even boredom," rather than because of a massive new wave of selling.

Detrick noted that history hasn't been of much use in predicting what would happen to stocks in this downtrend.

"This bear market has thrown everything out the window," he said.

Photo: Edvard Munch's "The Scream."  Credit: Associated Press