In baseball, it’s three strikes and you’re out.

In a research piece just fired off to clients, Merrill Lynch’s chief market analyst Richard McCabe observed the market has already had its three strikes, which recently knocked down the major market averages to new 2004 lows. The three strikes, which suggest still lower stock prices ahead, are as follows:

* Investor concerns about new highs in crude oil prices (above $47.50 a barrel).

* Several weaker-than-expected economic reports (such as the paltry 32,000 jobs created in July and disappointing second-quarter GDP growth of just 3%).

* Warnings about potential terrorist threats (with a number of specific American sites cited).

This trio is more than enough to scare the dickens out of most investors. Nonetheless, the Merrill analyst takes a positive view of the market, as does liquidity tracker Charles Biderman, president ofTrimTabs.Com, an on-line institutional research service in Santa Rosa, Calif.

The two men, citing favorable technical and liquidity trends that indicate to them higher stock prices, are essentially bucking what some call the “gruesome twosome” – spiraling oil prices and mounting terrorist fears. Creating a bit more chaos, this worrisome twosome is occurring during a new uptrend in interest rates.

Still, Mr. Biderman tells me this is a good time to tango because he believes the current market malaise is driven by fear, not by fundamentals. Part of his bullish reasoning is based on what he sees as these positive liquidity trends:

* Corporations are currently buying back their stock at a rate of $1 billion a day.

* Insider selling has dropped sharply the past few months – from $400 million-plus a month to about $300 million.

* New offerings, excluding the Google stock sale, have plunged to $100 million a day from $600-$700 million a day in recent months.

* On the economic front, weekly unemployment claims continue to hover around 335,000, which is consistent with job growth of about 200,000 a month. What’s more, over the past four weeks wages and salaries surged 6% year over year, while online job postings have risen 5.2% over the last two weeks.

To our liquidity tracker, it means “if we can get through the Olympics and the Republican convention without another terrorist act on U.S. shores, you could see a 20% pop in stock prices over the next three to six months.”

Mr. McCabe believes the big market question is whether the break in the key stock averages below their May-July lows represents the start of an extensive further phase of the decline of the last six to seven months or if it’s some kind of emotional-give-up finale to the entire decline that will soon be followed by a sustainable new advance. Mr. McCabe casts his ballot for the latter on the theory the major averages can challenge or exceed their first quarter recovery peaks later this year.

Since reaching their post-2002 recovery peaks in the first quarter of this year, renewed market weakness has taken the Dow down 8.6%, the S &P 500 8.1% and the Nasdaq Composite 17.5% from their first-quarter highs.

Mr. McCabe’s optimism is largely based on some positive technical implications. For starters, he points to nonconfirmations between the major averages. If that sounds like Greek to you, ditto me. In simple lingo, it means the averages are diverging and do not confirm a specific market direction, which in this case would be down. A case in point is said to be the divergence between the Dow Jones industrial average and the Dow transports, which have managed to hold above their March-May lows. Such nonconfirmations, which can occur at peaks or troughs, often indicate that a trend reversal is imminent, Mr. McCabe observes.

Yet another positive technical indicator is the CBOE put-call ratio, which recently jumped to 138%, the highest daily reading since December of 1994, when it rose to 156%. That occasion marked the end of the market’s 1994 bottoming process and led to the 1995-1998 bull market cycle. Mr. McCabe notes a reading in this indicator above 130% has occurred only five times over the past decade. And all of them took place either during rallies which produced further gains or at around important intermediate-term or major market bottoms.

Meanwhile, at least a fair number of individual investors seem to share the enthusiasm of our two market enthusiasts, indicating they think the “gruesome twosome” are not the monsters they’re supposedly cracked up to be. This can be seen in their purchase in last month’s declining market of $7.7 billion worth of stock mutual funds. Interestingly, fund managers themselves apparently are not as enthusiastic as the fund buyers, having invested only $700 million of that $7.7 billion.