Why Won't the Stock Market Panic Already?

Call it the chicken and the egg dilemma of this market: As stocks continue their summer swoon into bear territory, investors are looking for a panic-driven capitulation point to send things back upward.

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Yet those same investors won't just go ahead and panic-sell to create the capitulation point.

So why not?

One reason investors aren't panicking could be that it really isn't warranted at this point.

"I don't think the market is trading down to low levels, I think the market is trading down to levels it should be at," says Ron Ianieri, head of Options University, in trying to put a fine point on the dilemma. As for what would indicate to him a real capitulation, he says, "I don't want to see the market down 100, I want to see the market down 500."

Another reason could be that investors may have become somewhat immune to sharp market downturns and don't quiver as much when bad things happen.

"It wasn't that long ago that we went through a very bad market," says Nadav Baum, managing director of investments at BPU Investment Group, referring to the market boom of the late 90s and the bust that followed in 2000.

"That's why people aren't too freaked out," he adds. "They figure - 'Hey, I just went through it. I held on and I did pretty good ... how much worse can it get this time?'"

Still another could be investors' reluctance to sell into a slump and lose their investments, especially if they're relatively later-comers to the market, say within the last five years when stocks have gained only marginally.

Whatever the reason, there's little doubt the market has not hit that point where it is so oversold that investors have no choice but to buy.

Yet it's not like there aren't at least some excuses to throw in the towel: Oil on a never-ending charge into the stratosphere, major indexes having their worst performances in years, continued problems at the nation's biggest banks, and so on and so on.

But it was the same old story in Tuesday trading: Indexes waffled around bear levels--indicating they had fallen 20 percent off their highs--but the Volatility Index remained in relatively tame territory. Noontime news that most automakers' sales were even worsethan the dismal level the market already anticipated sent the Dow into a 100-point tailspin, but that drop reversed itself when General Motors said its decrease in sales was less than the market expected.

Barry Rosen, who runs the Fortucast service, which predicts market movement, has been calling for the Dow to fall below 10,000 and the other indexes to drop precipitously as well. While a few week ago his calls seemed outlandish, they now appear to be closer to reality than the sentiment among a whole lot of other market pros that expect full capitulation could still be weeks if not months away.

"Psychologically, people are hopeful and they don't want to bank losses if they got in at certain levels," Rosen says. "If you got in five years ago you're starting to reach levels where you're going into the red. That's probably where we need to go a little bit before you get that kind of capitulation."

Can You Still Short the Market?

In the meantime, aggressive investors will continue to try to make money, and for some that has meant short-selling. While there appears to be at least a somewhat growing sentiment that the shorts have had their day, Rosen and Ianieri believe the market still has room to tumble.

Ianieri, who has been aggressively shorting the market since it came off its March lows, says there's still too much detritus amid the markets and the economic picture to encourage the kind of trading that indicates capitulation.

And he said that when you take a good look at the big picture, stocks are right around where they should be, perhaps even higher as he remains committed to at least some of his short positions.

"We've had a huge divergence, where the economy was showing you there were problems here and the market traded against those problems and ignored those problems," Ianieri says. "You have get to get to the point that what's going on in the economy is reflected somehow in the market."

The apathy of investors in the summertime doesn't help either.

"We've not seen the capitulation yet and this week's going to make it very difficult because so many people have already taken off for the Hamptons," says Peter Miralles, president of Atlanta Wealth Consultants. "People go on vacations in the summertime. Markets for one reason or another tend to react historically in August and September. I guess that's more of a reason why September tends to be the worst performing month of the year."

Miralles believes the short trade has come and gone, and he is banking that oil and other commodities, particularly minerals, will continue to be the bulls that will offset the stock bears.

He looks to the second-quarter earnings season as holding the key to when capitulation will come.

"We've got to get through some earnings here. We need to get some of these writeoffs written off," Miralles says. "The financials are going to be a fantastic bargain once they've had major writeoffs on their book values."

To be sure, both Ianieri and Rosen point out that markets never go straight down, and both see a bear rally coming for stocks.

Rosen pinpoints a low in the cycle to hit July 10, at which time the Dow could get a nice bump of 800 to 900 points heading into August, when things again will deteriorate and blow out in September to a point where the Dow could see 9,500 or even lower.

If that combines with a collapse of another major Wall Street bank, that could be the point where investors finally hit full-fledged panic mode.

"At some point some of these banker-brokers are going to bite the dust and that certainly is going to freak people out," Rosen says. "I think we're still not quite there yet."