Market's Downward Spiral Lacks Teeth



Market's Downward Spiral Lacks Teeth

Though It Could Be the Beginning

Of a Bear Market, Many Analysts

Instead See Prolonged Correction

By E.S. BROWNING

Staff Reporter of THE WALL STREET JOURNAL

September 27, 2004; Page C1

The stock market has a negative look to it.

Literally.

A chart of this year's market reveals the kind of pattern that analysts hate to see -- ever-weakening rallies followed by repeated slumps. The Dow Jones Industrial Average hit a 2½-year high on Feb. 11, but since then it has steadily ratcheted downward. Each decline has taken the blue chips to a new low for the year, and each rebound has peaked below the last one. The latest rebound seemed to lose steam last week.

As the analysts put it, the market has been hitting "lower lows and lower highs," the market equivalent of a downward spiral. Unless stocks shake it off, it is the kind of process that leads to the end of a bull market and the onset of a bear market.

"The definition of a downtrend is a lower low and a lower high," notes Phil Roth, chief technical market analyst at New York brokerage house Miller Tabak & Co.

Many analysts say they aren't too worried yet. They forecast that stocks will emerge from their slump this fall, perhaps once investors believe they know the outcome of the presidential election. Stocks often begin a rally in the fall and continue into the new year. That is what happened last year.

But if the market doesn't change character and if stocks continue to sink, it would mean that the bull market ended with the February high, and that a bear market has begun.

"It could be we are in a bear market now," Mr. Roth acknowledges -- although he, too, expects stocks to rally in the fall and hit at least a nominal new high in the first part of next year.

The most common definition of a bear market is a decline of 20% from a high, and by that definition the bull market isn't yet in danger. After last week's slump, the Dow is only 6.4% below its February high. Even at its August low, it was down just 8.6% from that high.

Last week, the industrials fell 237.22 points, or 2.31%, to 10047.24, including a gain of 8.34 points, or 0.08%, on Friday. It was the worst weekly decline since the week ended Aug. 6.

Analysts typically believe stocks always are in either a bull market or a bear market. By the simplest definition, a bull market begins when stocks bottom out and begin a rally of at least 20%. A bear market begins when the market hits a peak and then falls at least 20%.

But amid the up and down action, it can be hard to know where you stand. As with a recession, you sometimes don't know you are in a bear market until it is almost over. There can be long periods when stocks seem to be in no-man's-land: possibly in a bear market, but maybe just pausing before they rise again.

The decline so far this year seems painful compared with the Dow industrials' 25% gain last year, but it actually has been unusually calm. The 8.6% difference between the year's high and low is the smallest amount since 1992, when the range was 8.1%.

That is one reason many analysts are inclined to see the year's slump as a prolonged "correction" -- a pause in a bull market -- rather than the onset of a bear market. They like to call the recent action a "trading range," even though the range has had a downward tilt to it.

"October is going to be choppy and sideways because at this point everyone is going to wait until after the election" to put money to work, says David Briggs, head of stock trading at Pittsburgh mutual-fund group Federated Investors. After that, he says, he is betting that the market will break its recent trend and head upward.

The market still is struggling with too many uncertainties, he says. Big companies are in what investors call the "warning" season, as businesses ranging from Intel to Colgate-Palmolive realize that quarterly performance will fall short of market expectations and issue statements alerting investors. Oil futures Friday hit another 21-year high on the New York Mercantile Exchange.

But once the warning season ends, Mr. Briggs says, the actual results may reassure people. People also seem to be adjusting to the Iraq and terrorism risks. In addition, the economy doesn't seem to be heading for recession, and interest rates are exceptionally low. Mr. Briggs even thinks that posthurricane payments from insurance companies and from federal disaster relief could help boost the economy, as people rebuild.

"I just can't see a bear market," Mr. Briggs says. But, regardless of which way the market goes, investors could get a clearer indication this fall. "We are setting up now for a breakout one way or the other," he says.

"It is all these big-picture issues that are holding things back, and it could be a month before we break out of the range we have been in," says Jeffrey Kleintop, chief investment strategist at PNC Advisors, the investment-advisory unit of Pittsburgh's PNC Bank. He, too, says he expects the market will move ahead, because he thinks the economic recovery will continue.

Paul Desmond, president of Lowry's Reports in North Palm Beach, Fla., says he sees no signs yet to suggest that the bull market has ended. Mr. Desmond thinks the market's real problem is simply that some of its bigger stocks have been among the weakest, which is holding the major indexes back.

Mr. Desmond maintains an index that tracks the stocks of the companies listed on the New York Stock Exchange, without adjusting for market value. It counts small companies the same as big ones. That index hit a record high about 10 days ago, he says. What is more, the cumulative number of advancing stocks has continued to outpace the number that are falling. In general, the decliners start to outpace the advancers four to six months before a bull market ends, he says, which means that the bull market probably isn't over.

"There are substantial gains going on here and we are in a bull market," Mr. Desmond says, even though some of the bigger stocks, such as Wal-Mart Stores, Intel and Cisco Systems, aren't taking part.

Still, says Mr. Roth of Miller Tabak, the fact that some groups of stocks are beginning to falter suggests the bull market is getting old and tired. "If we haven't had the whole bull market from the 2002 low, we have had most of it," Mr. Roth says. He is forecasting a fall rally and new highs in the first part of next year. After that, he worries, stocks may have real trouble moving higher.

Friday's Market Activity

Halliburton advanced 4.2% to $33.58. The oilfield-services company said it is restructuring its Kellogg Brown & Root engineering and construction unit and would consider selling or spinning it off.

Grant Prideco jumped 3% to 20.66, one of several oil-related companies to rise on news of a 21-year high for oil futures. Ensco International rose 3% to 32.45.

--Cynthia Schreiber

Write to E.S. Browning at jim.browning@

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