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Bull Rally Slam-Dunks Predictions of 'Experts'

May 21, 1993|TOM PETRUNO

The stock market has suddenly become an in-your-face basketball game between the bulls and bears. And it doesn't look good for the bears.

On Thursday, the Dow Jones industrials drove up another 23.25 points to a record 3,523.28 after Wednesday's stunning 55.64-point rally.

In the NASDAQ market of smaller stocks, all but written off as dead money a few weeks ago, trading volume hit an all-time high of 343 million shares on Thursday. The NASDAQ composite index, covering about 4,000 stocks, jumped 7.00 points to 697.43 and now is just 1.6% below its record close reached in February.

Like most great rallies, this one came out of the blue, leaving market pros scrambling to explain the "turnaround" in investor sentiment.

But in fact, nothing has changed for the vast majority of investors, meaning individuals. They've been bullish all year, which is obvious from the record amount of cash they've poured into stock mutual funds.

Unfortunately for those individuals, too many of their fund managers sat on that cash in March and April, when they should have put it to work. Instead of heeding their investors, those managers followed what became an increasingly gloomy official line from Wall Street.

A weekly poll of independent investment advisers nationwide, tallied by Investors Intelligence of New Rochelle, N.Y., shows how the bulls wrongly turned into bears this spring:

* The week of March 22, the poll showed 48.7% of advisers bullish, and only 30.1% bearish. At that point, the market had just completed a powerful run-up from late February.

* As the market turned choppy in the weeks that followed, many stocks were hit hard by profit taking. Instead of viewing the lower prices as bargains, however, the bulls wrongly retreated.

By early this week, the bulls in the II poll totaled just 32.1%--the lowest percentage since September, 1990, when this bull market began.

Like any free market, the U.S. stock market has a wicked penchant for making fools out of the majority. Thus, here we are in the midst of a terrific rally, with the bears scrambling to get back into stocks.

Didn't the bears have good reasons to be pessimistic about stocks? After all, inflation began to perk up this spring, pulling gold prices and bond yields higher as well. President Clinton has been a general bummer for stocks all year, first with his tax-hike package and lately with his incessant waffling.

True, say the bulls. But they also argue that the bad news has been grossly exaggerated. For instance: How much trouble can it be for stocks if the 30-year Treasury bond yield bounces between 6.75% and 7.10%, which is what we've seen for the last few months? Is that a bull market killer? Hardly.

What too many pros have been forgetting is that the big picture still looks favorable for stocks, because the ultimate determinants of stock prices are economic growth and rising corporate profit--both of which we have.

"Despite the fact that it's in fits and starts, the economy is recovering," says Kurt Winrich at Winrich Capital Management in Lake Forest, Calif., which manages $280 million. "When I put together all the factors affecting stocks, I'm comfortable staying (invested)."

Of course, the alternative to staying put is to try and time the market's short-term swings. But that's exactly what many pros have been trying to do this year. And that game just keeps getting tougher, because the market's swings are becoming more compressed.

Blink, and you miss a buying--or selling--opportunity. Then the market is back to new highs.

At some point, of course, this bull market will end. But it probably can't end when so many people keep betting against it.

Just Thursday, the New York Stock Exchange said that "short" interest--the number of borrowed shares sold short, in a bet that prices will drop in the near future--jumped to 994.1 million as of mid-May, up from 966.7 million in mid-April and the second-highest total ever.

Because stock prices are going up again, rather than down, those short-sellers are now panicking. To close out their wrong-sided bets, they can do only one thing: Buy new shares to replace the ones they've already borrowed and sold.

Perversely, the shorts' forced buying merely adds to the pent-up demand for stocks from other investors who've sat out too long this spring. The upshot is a market that will probably surprise everyone with its gains over the next few months.

As always, it ain't over till it's over--and it ain't over.

Whatever Pros Say, Do the Opposite?

Only 32.1% of the investment advisers polled weekly by Investors Intelligence newsletter in New Rochelle, N.Y., were bullish this week--the lowest number since September, 1990. So naturally, the market has rallied. Bull and bear readings since year's end:

Week of: Bulls Bears Dec. 27 49.1% 33.1% Jan. 11 42.7 38.5 Jan. 25 42.7 36.8 Feb. 8 44.7 32.5 Feb. 22 45.4 33.6 March 8 47.0 30.0 March 22 48.7 30.1 April 5 46.0 31.0 April 19 41.5 32.4 May 3 39.3 33.0 This week 32.1% 38.4%

NOTE: Advisers who are neither bullish nor bearish usually say they expect a short-term correction.

Source: Investors Intelligence

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Blue chip stocks rose further into record territory. D2.

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