Indexes Flag Bull Market; Not All Agree
November 24, 2001 08:18 AM ET
By Haitham Haddadin
NEW YORK (Reuters) - Major U.S. stock market indexes are either in, or about to enter, a new bull market; that's if you follow Wall Street's basic definition of a 20 percent or better rise from the lows.
Some pundits agree, saying Wall Street is witnessing the birth of a new bull, albeit described as on the scrawny side at best, not the charging bull of the 1990s. Other market watchers believe the eight-week advance smacks more of a bear market trap.
"Bearish people say it's just a bear market rally," said Holly Liss, chief technical strategist at Fuji Futures. "They will say you can have a rally without doing any damage to the bearish picture. That's what they are calling it right now."
The 19-month-old bear market, according to Liss, put in its lows on Sept. 21, the day a massive wave of selling peaked when the market reopened after a four-day shutdown in the wake of the Sept. 11 attacks on New York and the U.S. Pentagon.
During that sell-off, the market indexes carved out three-year lows, with the blue chip Dow Jones industrial average .DJI falling to a closing low of 8,235.81, the tech-laden Nasdaq composite index .IXIC to 1,423.19 and the broad Standard & Poor's 500 .SPX to 965.80.
By the close on Monday, the Dow was up more than 21 percent from that level, Nasdaq up 36 percent and, the S&P more than 19 percent. This means, using the Wall Street rule of thumb, that the Nasdaq is well into a bull run, the Dow has entered a bull market, and the S&P is within sight of being invited to the parade, much like other indexes such as the wide Wilshire 5000 .TMW, up 19 percent, from the lows.
IS THE LOW THE LOW?
"I think those Sept 21 lows, those are the lows that we are going to see in the stock indices," Liss told Reuters. "This is the beginning stage of a bull market."
The bulls argue that over the last few decades, the market has worked as a discounting mechanism, and the latest advance factors in a recovery in the first half of 2002. Some better-than-expected economic data are starting to emerge -- such as the retail sales last week and housing starts on Monday.
"The stock market is a leading indicator and it tends to turn 6 to 9 months before the economy," Liss said.
The recovery will come as a result of a very aggressive monetary easing campaign by the Federal Reserve, which has lowered interest rates 10 times already in 2001 to boost the economy, in addition to fiscal stimuli from the government such as tax rebates and increased spending, she said.
THE BEARISH CASE
The market bears disagree, saying this is just another rally in a bear market, the U.S. economy is not coming out of a contraction and that it's not going to be a V-shaped recovery. "Good" economic data can be discounted as one-offs.
Alan Newman, technical analyst at research boutique H.D. Brous & Co, thinks the grizzlies will come back in full force in 2002 as economic conditions worsen while consumers and corporations remain under mountains of debt.
The latest rally, he said, came as a result of the oversold nature of the market, or basically investors sending stocks down too low, too fast -- basically the "sling-shot effect".
"I don't think we are in a bull market; we are still on the tail end of a mania. We are probably in the worst bear market of our lifetimes," Newman told Reuters. "I think what has to be understood here is professionals and the public alike are still extremely bullish. They never really got very bearish."
No amount of monetary easing will kick-start the economy just yet, adds Newman. The record economic expansion in the U.S. economy in the 1990s was primarily due to corporations and consumers extending themselves as much as possible, he said.
AGREEING, TECHNICALLY
Bulls and bears agree on one thing: The rally has left the indexes hovering below key resistance levels. The bears say this is where the rally will run out of steam as investors wanting to lock profits or break even unleash a big supply of shares. Bulls say these are the watermarks that need to be convincingly overcome, for a quality rally to ensue.
"You can call it a psychological barrier," Liss said. "You're getting close to critical levels in terms of old lows and psychological levels, like on the Dow that 10,000 level is clearly going to be something interesting to watch."
Round numbers also tend to both attract and repel the market, she said, leaving the next hurdles for the S&P and Nasdaq at 1,200 and 2,000. By Monday's close, Dow was at 9,976.46, S&P at 1,151.06, and Nasdaq at 1,934.42.
In Nasdaq's case, such a move could pave the way for 2,300 or 2,400, although she thinks this market can go a lot farther and faster, once it breaks through 2,000. If Dow closes above 10,000, that opens the flood gates toward 10,700, Liss added.
Meanwhile the bears say the bullish momentum could carry the indexes just a little further from Monday's levels -- the Dow to 10,200, S&P to 1,177 and the Nasdaq to 1,980.
In fact, the Dow could go to 10,500 and the S&P could conceivably hit 1,249, says Newman, who adds that his bearish bets would be off if the S&P can break above that level which is the mid-point between the index's all time high of 1,527.35 and the Sept. 21 lows. He thinks the probability is remote.
"We never had a retest (of the Sept. 21 lows) and that's one of the reasons why I continue to remain bearish longer-term," said Newman, who expects a smaller pullback to about 1,060, 1,750 and 9,200 in the S&P, Nasdaq and Dow respectively, before they can rally.
John Roque, analyst at Arnhold and S. Bleichroeder, says the latest gains are not justified and likens the market action to the fictitious 1970s hit television show "The Six Million Dollar Man" featuring actor Lee Majors as Bionic Man Steve Austin.
"With bionic legs the market jumps over any and all problems," Roque told clients in a sarcastic note. "Forget reruns of 'The Six Million Dollar Man,' because it's starting to feel Bubblicious all over again."
reuters.com |
