Stocks Won't Stay Down—and Investors Don't Like It

Despite their venture into bear country over the past two trading days, stocks haven't had a big-volume blowout selloff yet, and some on Wall Street aren't happy about it.

Oliver Quillia for CNBC.com The New York Stock Exchange, downtown Manhattan.

While rooting for a major drop in stocks is counterintuitive for investors—at least those who aren't shorting the market—there's a strong sentiment that the market needs to go lower before it can go higher. But with a pervading lethargy ruling Wall Street, investors are beginning to lose their patience for direction.

"We just haven't had the capitulation that we're looking for where everyone is saying, 'Hey this thing is shot, we've got to get out,'" Gordon Charlop of Rosenblatt Securities, said on CNBC. "So people are holding on."

Monday's trading marked another day of anemic volume, which has been present even on days of big index declines like the market experienced last week. Despite the indexes testing their March lows, there is virtually no evidence of panic, with investors engaged in an essentially orderly selloff based on soaring energy prices, banking troubles, and weakness for consumers. But such a panicked, high-volume capitulation might be exactly what stocks need in order to reassert themselves.

One of the primary indicators of fear among investors, the Chicago Board Options Exchange's Volatility Index

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[VIX  Loading...      ()   ], has remained at levels indicating only moderate jitters across the market. That in turn is making investment advisers edgy as they look for market entry points and try to assuage their nervous clients that a turnaround is in sight.

"As much as I would love to see something like that ... I don't think we're going to get it," says Michael Cohn, of Atlantis Asset Management. "The sellers are done selling, and I think that a catalyst for this market is going to have to be some halfway decent economic data. Otherwise, it doesn't seem like this market wants to rally."

When the Dow Jones Industrial Average hit bear-market levels Friday and Monday—that is, a 20 percent decline from its high—some thought that might indicate capitulation. No such luck.

"We were getting close to what could turn into capitulation," Art Cashin, director of floor operations at UBS, said on CNBC. "I thought today could be a purge—we'd get it all out. We'd get your 20 percent, we'd get a volume reversal tomorrow and maybe spend a little summertime at the beach."

That wasn't the case, though, as moderating energy prices allowed stocks to edge higher.

Investors are frustrated as it becomes increasingly difficult to play a market that has little conviction, either up or down.

When the Norm Becomes Abnormal

Charlop, in fact, recommends looking elsewhere from the usual plays in times of uncertainty—consumer staples, for example—and instead toward individual industries that have outperformed, such as fertilizer, where Potash

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[POT  Loading...      ()   ] has been a star this year.

"Buying stocks just on a technical basis is not going to make your portfolio any stronger," he says. "You've got to go back to the things that are working well."

Indeed, investors everywhere are rethinking their strategy in a market that seems to be dictated by oil and housing rather than performing according to time-tested rules. Normally, stocks rise when housing falls and interest rates are low.

But that hasn't been true lately, even as both housing and rates have moved in the right direction for stocks.

"We have people nervous. With oil at $140 (a barrel) everything becomes of function of the price of oil. Industry after industry just becomes a bet on oil," says Brian Gendreau, investment strategist at ING Investment Management. "People are scrambling to adjust."

Gendreau says there are still a number of industries performing well despite pervading weak spots in the economy. He cites capital equipment makers who are supplying the world's agricultural industry, as well as health care.

He says he too is hoping for capitulation but also does not see the widespread fear in the market that has denoted other market bottoms. Others share his view on both counts.

"I think first and foremost you've got to see more volume," says Steve Sachs, director of trading at Rydex Investments "You've got to see a lot more price dislocation—it's fairly concentrated. I just ultimately don't think we're seeing the volume associated with capitulation."

Investors were bedeviled again Monday, as an early upsurge in oil prices reversed itself by late morning and, sure enough, the stock market turned around and posted mild gains on low volume.

Of course, this doesn't mean there's no opportunity, but it makes the effort to find a market rhythm that much more difficult.

"If you're looking for (capitulation) then you'll probably wait too long and you might miss some opportunity," says Cohn, who likes some of the non-brokerage banks as investments. "There's zero buyers, and just natural sellers in this market are taking this thing down. Gravity hits the market. No one's willing to step up to the plate and that's probably one of the best times to be buying."

The search for a catalyst has led some to look forward to earnings and outlook reports that may tell Wall Street where things are headed.

"You've got to be concerned about this quarter's market," Charlop says. "As we get further into the year and there's less to hang your hat on, in the earnings forecasts, that's where you're going to see your trouble. That's where you're going to see capitulation."