Hints of a market nearing bottom

In 1975, a major slide in the stock market was halted when oil prices started to fall and investors sensed the economy was turning around.

In 1982, then Federal Reserve Chairman Paul Volcker ended a dramatic decline on Wall Street by abruptly reducing interest rates. Five years later, the current chairman of the Fed, Alan Greenspan, rescued investors after the Crash of '87 by flooding the economy with money.

What will it take to end the bear market of 2002?

In a word – if there is one word – self-correction.

Most analysts don't see any outside action or catalyst that will magically revive one of the biggest declines on Wall Street since the 1930s. Instead, it will largely require a shift in psychology – those who are panicked or pessimistic will have to get out.

In the paradoxical world of Wall Street, panic selling is often viewed as a good sign. The theory is that during a boom market many investors buy in the exhilaration of the moment and pay too much for stocks. Panic selling is a sign they have finally succumbed to the market, paving the way for a turnaround.

Some analysts now see signs the markets are near the bottom – though there could still be volatile ups and downs. Many panicked investors are, indeed, bolting. Corporations are expected to have better earnings in the near future.

And due in part to legislation passed by Congress last week, those earnings will likely carry more credibility.

Some companies, too, are spending billions buying back their own stock – in essence, saying they believe in their earnings and their future. If all of this leads to higher stock prices, the market will improve because investor psychology is finally turning.

"The higher the level of volatility, the higher the level of fear," says John Alexander, Breazeale professor of financial planning at Clemson University in South Carolina. With fear high, "I am confident in saying we have seen a short-term bottom."

Another sign the psychology may be changing: By the time plunging markets are over, dollar-inhaling bears have decorated the covers of magazines from Business Week to Newsweek.

Last week, the bear was on the cover of Baron's, a financial publication. In fact, at the bottom, bear markets have one thing in common: "Everyone hates stocks," says Jeff Hirsch, publisher of the Stock Trader's Almanac.

Experts point to other signs the markets may have reached this point. Small investors are bailing out of mutual funds, perhaps signaling that they are disgusted with their losses. "They aren't asking if I should buy, they're just selling everything," says Mr. Hirsch.

At the same time, even though corporate earnings are starting to come in above expectations, prices are falling even on the good news. "A lot of it is the herd mentality," says Mr. Alexander.

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