Watching the bull for signs of health Analysts in conflict over what direction stock market is taking

November 02, 1997|By Bill Atkinson | Bill Atkinson,SUN STAFF

For at least the past seven years, experts have been waiting for the unstoppable stock market to hit the wall.

Last week, it looked as though it was about to happen.

Turmoil in Asian markets sent the Dow Jones industrial average, the barometer of 30 blue-chip stocks, plunging a record 554 points, or 7.18 percent, on Monday. The following day, the market snapped back with a record 337-point gain. But by week's end, the Dow was still bloodied, down 262 points or 3.4 percent, from the opening bell Monday.

The wild swings raised, if nothing else, this question: Is the longest-running bull market in history finally about to die?

As with all things concerning Wall Street, there is sharp disagreement.

One group argues that the bull market, which generally is pegged from August 1982, is well and has plenty more life.

Another is convinced the market's postion is so precarious that one negative event, such as a rise in interest rates, could kill the bull.

"I'm nervous," said Don Hays, director of investment strategy with Richmond, Va.-based Wheat First Butcher Singer Inc. "It is a little too soon to say it is dead, but I think it is approaching the end. The volatility and the [stock] valuations suggest that it is overdue for a significant pause, to say the least."

Seven months ago, Hays was as bullish as they come, and he had plenty of reason. The economy was rosy, and the market was on a tear. The Dow climbed 33.5 percent in 1995 and 26 percent in 1996. By Aug. 6, when it reached its all-time high of 8,259.31, it was up 28 percent for the year.

But seemingly overnight, a nervousness has crept into the stock market, sparked by fears that large U.S. corporations doing business in Asia will suffer losses because of severe financial problems in Singapore, Malaysia, Thailand and the Philippines.

The market plunged on Monday as the Dow fell to 7,161.15, down more than 13 percent from its August high. By the end of the week, it was down 9.9 percent from the August high.

A bear market is defined as a drop of more than 20 percent from its high. For the past seven years, the bull has had an amazing run without taking a loss of more than 10 percent.

Last week's swings have added fuel to the argument that the bull could be in jeopardy.

Analysts were reminded of the crash of Oct. 19, 1987, when the Dow fell 508 points, and, some say, ushered in a brief bear market. The trading patterns were remarkably similar: a huge drop on Monday, followed by a large gain on Tuesday, and then the see-sawing, one day a loss, the next a gain.

"It is kind of eerie," said Robert Brown, chief market strategist at Ferris, Baker Watts Inc. in Baltimore.

Those who believe the stock market is primed for a prolonged decline argue that the companies that have driven the Dow and the Standard & Poor's 500 stock index, like Coca-Cola Co., Gillette Co., Microsoft Corp. and Eastman Kodak Co., are too highly priced, and their earnings are peaking.

"We have had a market mania in the major indexes with fewer and fewer large capitalization stocks pushing up the market," said Tony Spare, market strategist with San Francisco-based Spare, Kaplan & Bischel, which manages $2.5 billion in assets. "We have now begun to see an unwinding of that market mania."

Gail Dudack, chief equity strategist at New York-based UBS Securities LLC, warns that the Dow could fall to 6,300 by the end of the year, a 23-percent drop from its high. She argues that stocks are overpriced and investors are too confident that earnings will continue to grow.

"They feel totally comfortable and confident," she said.

Hays, who predicted in November 1991, when the Dow was at 3,080, that it would rise to 5,600 by June 1996, sees the market moving "sideways" for the next several months. He said he doesn't think it will break the August high for the next two years.

There are "all kinds of black clouds on the horizon," he said.

One of the biggest is Asia.

Countries in the Far East are suffering because of rising interest rates, currency devaluations and collapsing real estate values.

"Every one of these countries is going to be paralyzed," Hays said. "They have got to get their currency stabilized."

He worries that the economies of China and Japan could also falter if the problems are not resolved soon.

"All of the world is trying to stop this crisis," he said.

But others argue that the market will continue to climb despite problems overseas. They say the domestic factors that have pushed it higher -- low inflation, steady corporate earnings, low unemployment, low interest rates -- are still in place.

"How much lower could stocks go?" asked Edward M. Kerschner, chief investment strategist at PaineWebber, in a recent report. "Anything more than about a further 5 percent decline in stocks seems unlikely."

He sees strong growth in corporate sales and earnings and says that Asia accounts for only 18 percent of total U.S. foreign direct investment.

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