Bears say bulls ignoring signs of trouble
By Pierre Belec
NEW YORK (Reuters) - The Good News: The stock market has lost some of its insanity. The Bad News: There's still more suffering ahead for investors.
Wall Street is coming off one of its worst sell-offs ever, with the Dow Jones industrial average down a head spinning 1,800 points in the last six weeks.
The jarring drop of nearly 20 percent -- and a loss that big is considered by some analysts to be a signal of a bear market -- has cured some of the speculative excesses that had priced stocks out of this world.
But the experts say it may be too early for investors to put away their hard-hats. The fuse on the global economic problems is longer than most people believe and there will be more explosions in the weeks ahead.
''The 'Father of All Bear Markets' has begun,'' says James Dines, editor of the Dines Letter, who has just closed the books on 'The Mother of All Bull Markets.'
''The fact that the Dow kept plunging last week despite its deep oversold condition and that it knifed through the 8,000 area without having paused, is even more ominous than Japanese markets having collapsed to new lows,'' he said.
The Belvedere, Calif.-based investment advisor warned that there's more trouble on the horizon, with Latin America possibly the site of the next crash after the bloodbaths in Asia and Russia.
Dines said the market's slide, capped by Monday's fall of 513 points -- the second-largest in the Dow's history -- was reminiscent of the 1973-74 market ''smash'' when stocks fell nearly 47 percent.
During the Grand-Daddy of all bear markets, the Dow slid from a Jan. '73 high of 1,067 points to 570 by Dec. '74 on fears of a weakening economy and the oil-price shock from the Arab oil embargo.
Today's market, having zoomed without a correction since 1996, faces an equally frightening future.
There is concern that the economic sickness in Asia, Japan and Russia could spread to the United States, via America's big trading partners -- Canada and Latin America.
In the last six weeks, the Dow has fallen from a record high on July 17 of 9,337.97 to a low of 7,539.07 Monday -- a fall of nearly 20 percent.
Despite the drop, investors are not out of the woods yet.
''We have the historically negative September-Oct. period straight ahead,'' Dines said.
The experts say Wall Street should brace for more rough times because the list of victims of the global economic problems is growing. This week, the largest U.S. banks and brokerage houses confessed that their earnings were hurt.
Citicorp and Morgan Stanley Dean Witter & Co. are some of the Wall Street darlings that warned of problems from the world-wide market turmoil.
The companies may have given investors a taste of what to expect for the third quarter reporting season, which officially starts on Oct. 15.
Some experts say investors should expect more bear market spikes and they caution against being baited back into stocks simply based on the assumption that everything's all right.
''Monday's plunge brought out a lot of humility by the former bulls, but amazingly, by and large, they have not thrown in the towel,'' says Don Hays, chief investment strategist for Wheat First Union in Richmond, Va. ''They are still declaring this a bull market.''
The veteran market strategist expects the market to rebound a la 1987 post-market crash, when stocks recovered for a while and then went into a 3-month-long consolidation.
Valuation is the key to this market. In 1987, an over-valued Dow fell from 2,750 and eroded until it reached the under-valued level of 1,700, he said.
The current market is still too high, and the Dow's slide from its July high was not enough to correct its over-priced condition.
''The Dow would have to fall to 7,011 to be just over-valued and to 6,197 to be fairly valued, and 5,383 to be under-valued,'' Hays said.
He bases fair value on the ratio of the price of the stock to a company's future earnings, known in the market as the PE ratio.
Hays said the flushing action of a bear market is the best remedy for a rampant bull market, and in the end, it should make for another tremendous bull market.
''The pain that will be required will set the stage for a much, much healthier bull market that will drive stocks based upon earnings and revenue gains, rather than just a liquid stock that is able to manipulate earnings consistently, with very mundane revenue increases,'' he said.
For the week, the Dow Jones industrial average was down 411.43 points at 7,640.25 after plunging 482 points in the earlier week.
Th Nasdaq composite index fell 73.16 points to 1,566.52 and the Standard & Poor's 500 index was off 53.36 points at 973.89.
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Help we need an interest rate cut!
Regards, Jeff
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