THE RELIABLY WRONG CONSENSUS crowd is either fearful and frozen or blithe and inattentive. For investors looking to seize upon periodic extremes in market sentiment in order to bet the other way, the difference is crucial.
If Wall Street's recent run of anxious and inconclusive weeks indicates it's suffused with excess worry, then the smart money should be playing for a quick rally. If the polity of players is simply disengaged and unmoved, it could take at least another pullback before a good tactical buy point is reached.
Last week the indexes again trudged about, attempting nearly every day to make some forward progress, only to drift back by the close. This is the kind of pattern that can sap conviction from bulls and bears in near-equal measure.
The Dow Jones Industrials slipped 46 points to 9966. Each day the index spent time above the 10,000 mark, and each day it closed a bit below it, action that was even less exciting to watch than it is to read about.
The Standard & Poor's 500 slipped by all of two points to finish at 1093, while the Nasdaq Composite outperformed modestly, adding seven points to reach 1912.
Bond yields ticked marginally lower and oil prices softened slightly, which would seem to have cleared the way for stocks to make up some ground. But it wasn't to be. With no widely anticipated economic reports to focus the gaze of traders, stocks remained captive to the big structural and psychological issues that most are unsure how to game.
Stocks have been on a downward slant since early April and the indexes haven't made new highs since the first week of March. Swelling oil prices, ugly war headlines and a collective fixation on the prospect for the Federal Reserve kicking interest rates higher have placed the negatives front and center.
The abundant attention to known threats is one among several points being made by those who think the market is coiled to thrust higher.
The case for an upside respite also hinges on the one-sided selloff that culminated in a rapid intra-day rebound on May 12, when steep afternoon losses were erased in a hurry. The bulls, at least those who are bullish for a quick trade, are viewing that day's low as a significant one.
As the S&P 500 cascaded toward a 2004 low of 1076, certain measures of cumulative market breadth -- essentially, a running tally of winning stocks versus losers -- reached negative extremes not seen since the climactic lows reached in the fall of 2002.
The ratio of bearish put options traded to bullish calls has since held at high levels most days. Cash has flowed out of retail stock funds in recent weeks. Sentiment surveys showed a rise in bearish feelings. And the monthly Merrill Lynch global-fund-manager survey revealed a significant increase in caution among professionals, along with higher cash levels in their funds. All of these qualify as standard bullish signals for contrarians.
Several skilled investors who make a habit of zagging when the majority zigs have concluded that the current clever play is on the long side, for the above reasons and others.
Legg Mason fund manager Bill Miller, who's earned the market's regard during more than a decade of beating his benchmark, took to his firm's squawk box last week to tell the broker ranks that the market looks to have bottomed and the next significant move is likely to be higher.
Miller's call was unpublicized but made the circuit of market chatter, passed along respectfully by those who like to know what the smart guys are doing, and cattily by others, who note that Miller's funds are trailing the market this year.
There are other independent thinkers, skeptics until recently, who have also decided to play for a short-term rally. These include Jeffrey Saut, strategist at Raymond James, Doug Kass, manager of the hedge fund Seabreeze Partners, and Walter Deemer, the investment adviser who publishes Market Strategies and Insights.
In each case, these investors are expecting a rally in what they believe to be a long-term trading range with a bearish cast, one that frustrates the buy-and-hold crowd with its stingy and grudging gifts but rewards the shrewd (or lucky) opportunists.
But the way the market has traded since that supposedly auspicious low point of two Wednesdays ago nags at other market analysts. Rallies since then have been brief, abortive and supported by slack volume.
With so many voices declaring the market to be "oversold" and hanging firm at technical support levels, the fact that it hasn't yet bounced appreciably is in itself cause for some concern, says technical strategist John Roque of Natexis Bleichroeder.
Just how negative investor sentiment has become simply isn't clear. Short interest declined slightly in the month ending May 10. For all the talk of steep oversold levels, the broad market remains just 6% off its recent high, which may explain the lack of palpable fear out there.
And a survey of affluent investors by Smith Barney analysts, released last week, showed respondents' average long-term return expectation for stocks to be 20.8% a year, up from 15.7% last year -- hardly a sign of deep concern among the moneyed public.
The whole give-and-take surrounding the vigil for the Fed to begin lifting rates also holds interest for anyone looking to plumb the market's mindset.
Part of Bill Miller's point in his call was that the coming Fed tightening cycle won't be a repeat of 1994, when the first rate hike alarmed the stock and bond markets and led to broad declines. Indeed, the S&P has declined from its high almost as much as it did in response to the '94 rate move, a period that was followed by one of the best years ever in 1995.
This is Wall Street's latest stump speech -- that because the Fed shocked the market in February '94 and this time has well-telegraphed its intentions, the markets have fully discounted the effects well in advance.
