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How This Meltdown Stacks Up

Monday's ferocious market dive has Wall Street searching through the history books for some clues.


Some key stock indexes may not yet officially show it, but make no mistake: U.S. stocks are caught in a bear market, and the only remaining question is how severe the damage will become, experts say.

The main blue-chip indexes--the Dow Jones industrial average and the Standard & Poor's 500 index--both are down 19.3% from their July 17 peaks. That is just short of the 20% decline commonly viewed as the bear market threshold.

But after a ferocious plunge Monday that tore nearly 513 points, or 6.4%, from the Dow, Wall Street already is comparing this downturn to previous bear markets in the search for clues as to when it may end.

"Technically, is it a bear market?" asked James Stack, editor of the InvesTech Market Analyst newsletter in Whitefish, Mont. "It doesn't matter when your portfolio isn't in blue chips. You're already suffering bear market conditions."

Indeed, the Russell 2,000 index of smaller stocks now has plunged a stunning 31.2% from its April peak.

To be sure, no two bear markets are exactly alike. And even when there are clear similarities and differences, experts frequently disagree on what they mean.

In some ways, the current slide is almost identical to many earlier bear markets: It began with stocks being richly priced; smaller stocks began to weaken first, as investors flocked to "Nifty Fifty" large-cap issues; and it was heralded by rampant speculation in a particularly hot sector--in this case, unproven Internet-related stocks.

Nevertheless, today's bear market is distinct both in the forces behind the sell-off as well as the relative speed with which it occurring, experts say.

Unlike earlier bear declines, the current slide hasn't been caused by the usual forces of rising interest rates and a tattered U.S. economy, but rather by deepening world financial problems and the specter of deflation.

Some experts believe that's a relatively good scenario. It's far tougher to emerge from a bear market in which interest rates are climbing and the economy is crumbling than one where those factors are benign, they say.

"An equity market decline associated with a recession and a big profit [contraction] very often is very difficult to reverse," said Christine Callies, chief strategist at Credit Suisse First Boston Corp. In that case, "A lot of things are going wrong at the same time."

Not everyone agrees. The Federal Reserve Board can hike interest rates to douse an overheating economy, and can spark another bull market when the negatives are contained and rates are eventually lowered again, experts note.

But they worry that even if the U.S. central bank lowers rates this time around, it is powerless to fight the economic contagion spreading globally.

"There's no policy maker in a position to do anything about this," said Hugh Johnson, chief investment officer at First Albany Corp. "The problem is that this is not strictly a U.S. issue and that's what bothers me. It's a global issue."

The speed of the current correction is also noteworthy. The almost 20% slide in blue chips in slightly more than six weeks has come much faster than many other downturns.

The bear markets of 1973-74, when the S&P 500 fell 48.2%, and 1980-82, when it tumbled 27.1%, both lasted 21 months.

Though it's inflicting painful losses, the accelerating market decline of the past week has raised hope that this bear market will end relatively quickly. A prolonged bear, some experts believe, would be be severely damaging to investors' psyches.

How can we know how much further stocks will fall?

Many investors are waiting for a so-called capitulation day in which selling becomes so frenzied that investors tire themselves out. Such a day occurs when investors become so panicked that they dump stocks indiscriminately.

That typically marks at least a temporary rebound. In the market's often contrarian ways, extreme bearishness is considered to be good for the market.

Capitulation is thought to be a good sign because, as some investors dump stocks at any cost, other investors take advantage of the scattershot selling by picking up stocks on weakness.

Some analysts believe that the wild selling in big-name stocks on Monday may mark at least the beginning of the capitulation phase.

"Selling like this does not occur during the beginning of a correction," said Barry Hyman, senior market analyst at Ehrenkrantz King Nussbaum Inc. in New York. "This is the give-up, or capitulation, phase of the decline. It normally occurs near the end of a phase of the sell-off."

The market's intraday trading patterns may yield the best clue as to when the market will recover, analysts say.

If the market were to open up strong this morning, or any other morning following a big loss, that would be negative for stocks, many experts believe.

Ironically, that would show that investors are not yet fearful enough. As happened Monday when the Dow started the day with a small gain, selling likely would pick up in the afternoon.

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