Bull Market or Bear?

It could take years to reach a consensus, but one thing investors already know for certain is that we're not in Oz any more. IPO shares are not instantly doubling in price the day they go on sale, equity averages are not rampaging to new record highs every month or two, and the supposed "quality" stocks are not exactly shrugging off bad news.

Even the analysts -- Wall Street's Lollipop Guild -- are no longer hyping tech-sector shares as though they were a sure thing.

In fact, most stocks have been leaden since early in the year, and the hot air balloon that had effortlessly borne investors' expectations aloft for most of the last decade has more recently been drifting perilously close to the treetops.

If there's a bullish case to be made, it rests on the technical argument that some of the most widely watched averages, including the Dow Jones Industrials and the S&P 500, are still trading within 15 percent or less of their all-time highs.

Even so, since January those peaks have seemed more and more imposing with each failed rally. During that time, the news has waxed steadily less congenial, with soaring oil prices, faltering corporate earnings and a sluggish retail sector all contributing to the stock market's unaccustomed heft.

Some technical analysts would argue that today's troubles were foreshadowed nearly two-and-a-half years ago, when the ratio of new highs to new lows on the New York Stock Exchange peaked even though most share averages continued to waft higher.

What this means is that investors ever since have been increasingly selective in choosing stocks while the market as a whole has deteriorated internally.

The strong performance by a rapidly diminishing handful of stocks may have kept the bullish herd from noticing the slippage, but it has not distracted the chartists, who sense the market's foundations beginning to tremble.

The weakness is akin to that of a weightlifting champion who has shunned squats after becoming pathologically obsessed with his biceps. Pile on enough weight and his atrophied legs are certain to buckle.

Evidence continues to mount that the stock market is in similarly perilous shape:

• Rallies are becoming more fleeting, declines steeper and more prolonged. This tells us that smart money has been lightening up at every opportunity, deftly unloading as much stock into each rally as the traffic will bear. Lately, however, the supply of greater fools appears to have exhausted itself, with trading volume drying up every time shares move sharply higher.
   
• The lack of follow-through on rallies suggests that one of the most powerful sources of buying during the bull market -- short-covering by bears who have bet against it -- is mostly spent. While long-term investors help to buoy stocks by absorbing supply, it is panicky bears faced with margin calls whose desperate buying drives shares to new peaks. But if there are any short-side bettors left, they have long since been pounded into docility by a bull market that until recently had refused to give an inch.
   
• Companies that have reaped huge bonanzas from their investments in the stock market will be hit especially hard if shares continue to fall. In the second quarter, Intel for one, realized $2 billion in profit on one stock alone that it held in its portfolio Micron Technology, which has since fallen by more than 50 percent. For comparison, Intel reported $2.4 billion operating profits during the same period.
   
• A concerted effort by the central banks to support the failing euro against a freakishly strong dollar has produced hardly a blip, implying that the currency markets are beginning to spin out of control. The long bull market in the dollar will eventually end, wrecking the global bull market in securities and derivatives that to a large extent has fed on absolute and universal confidence in the dollar. But there will be no soft landing, and the dollar's reversal will not be at the pleasure of policy makers. I predicted here earlier that the turn will come with the euro trading near 73 cents, down about 16 pecent from a current 87 cents; I stand by that forecast.
   
• The huckstering of stocks by some of Wall Street's top analysts hasn't looked so miserably stupid or disingenuous since the days when their mentors were touting shares big-time just prior to the depressionary wallow of 1973-74. In a recent sample of 28,000 recommendations, 36.5 percent were "strong buys," 37.5 percent were "buys," 25.3 percent were "holds, and just 0.6% were sells. The shares of Intel Corp., the bellwether microchip manufacturer, were at the top of many analysts' "buy" lists when they hit their all-time high near $76 a little more than a month ago. Since then, Intel has plunged by more than 50 percent.
   
• Many companies that offer extravagant stock options to employees in lieu of fat paychecks will face higher labor costs or perhaps even layoffs as their shares languish below levels at which the options can be exercised. One source estimated recently that 40 percent of the options held by Amazon's employees, and 36 percent of those held by Microsoft's, are currently underwater.
   
• More and more dollars are needed just to keep the market afloat, never mind galloping to new highs. By month's end, mutual fund inflows of $307 billion will have produced a 12-month gain of just 5.4 percent in the S&P 500 index, according to the estimate of Alan Newman, editor of Crosscurrents newsletter. Even more shockingly, he notes, is that an estimated $129 billion of new cash for the period March through September will have produced losses of more than 4 percent. "There is something radically wrong with a market that sustains these incredible net inflows, yet can only go nowhere or down," says Newman.
   
• Market leadership has narrowed severely. Whereas a year ago a dartboard approach might have found winners six or seven times out of ten, lately only the energy and utility sectors have been performing well. Meanwhile, the Internet stocks that have led the bull market are undergoing a post-mortem, with many trading at just a small fraction of the prices they commanded a year ago.
   
• Stocks that have exhausted their upside or downside momentum are said to be overbought or oversold, respectively, and the degree to which this is so can be quantified on a chart. But when a stock's price fails to respond to an overbought or oversold condition and simply keeps going, it usually signifies a change in the underlying trend. Lately, many oversold stocks have failed to rally, instead going sideways for a while, then breaking sharply lower again. This is bear-market action, plain and simple.
   
• Day traders have been getting whacked. "You should see the number of retail accounts that have seen their once-mighty tech portfolios slip to nothing," says a friend of mine who is a partner in an online brokerage firm. "These rookies used to gloat about their profits," he says, "but now it looks like the market is squeezing their last dollar out of them."
   

Bulls may be pardoned for stubbornly resisting the tidal change, for they are no more undiscerning than those bears who saw every rally since about 1998 as prelude to a crash. In any event, it is far more important to husband one's capital in all types of markets than to be technically correct on the question of whether we're in a bull market or a bear.