Has the bear awakened from its five-year hibernation, or is the bull still alive?
That, of course, is the ultimate question confronting investors in the wake of this week's record 235.48-point plunge in the Dow Jones industrial index, a decline of 9.5% for the week and 17.5% since the Dow's record peak on Aug. 25.
Unfortunately, however, professional market watchers provide no clear-cut consensus. Some still believe that the 5-year-old bull is alive although aging. But more and more bears are crawling out of their caves. Many pros are simply straddling the fence, too cautious or unsure to choose sides.
Here are some of the arguments for a continued bull market:
- Adviser sentiment is becoming increasingly bearish. To many analysts, a large amount of bearishness among newsletter advisers and other experts is actually bullish for the market. That is because it means many investors have sold off much of their stocks, giving them a lot of cash with which to re-enter the market.
- An absence of euphoria in recent market peaks. Many technical analysts, who follow investor psychology and price patterns, say bull markets don't end until wild buying euphoria occurs, with a large majority of stocks setting highs.
But the short-term market peak earlier this month marked the end of "the weakest rally of the year," with no day when gainers outnumbered losers by more than 2 to 1, said Robert R. Prechter, editor of the Elliott Wave Theorist, a Gainesville, Ga., newsletter.
While that was bearish in the short term, it meant that the long-term bull market was still far from over, said Prechter, who helped trigger the beginning of the recent selloff with a sell signal on Oct. 5.
But some arguments point to a possible bear market. Among them:
- Alternative investments are increasingly attractive. Michael Metz, market strategist at Oppenheimer & Co., notes that many institutional investors are switching out of stocks and into intermediate-term bonds that now yield more than 9% with relatively little principal risk, compared to a recent average dividend yield of less than 3% for the Standard & Poor's 500. Of course, if stocks decline further, the dividend yield could improve.
The Japanese and other foreign investors--a major force behind the bull market--also are showing signs of increasing skittishness about U.S. stocks.
- The economy shows some signs of weakness. Rising inflation and lower unemployment signal a mature stage of an economic recovery. Bear markets usually precede recessions by several months.
- Corporate earnings gains have been disappointing in some cases.
- The latest correction is more severe than historical precedent would indicate. Most postwar corrections have ranged between 10% and 15% down, with the average of about 12% since 1949.