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Did bull market die and Wall Street miss it?
By Pierre Belec
NEW YORK (Reuters) - A curious thing has happened. The bull market died in the spring of 1998 but Wall Street still hasn't been told -- at least that's what some experts say.
The headline-grabbing stock market indices -- the Dow Jones industrials, Standard & Poor's 500 and Nasdaq composite -- may be cruising at record highs, but the truth is that many stocks have not kept up.
In fact, a big number of stocks are below the highs made in the rip-roaring days of the 1997 and 1998 bull market.
"The overall market has been in a bear market since April 1998. Yes, that is right -- 1998," said Don Hays, chief investment strategist for Wheat First Union in Richmond, Va.
It's a smoke-and-mirrors market.
"With only four technology stocks making up 25 percent of the weighting of the Nasdaq and the media only concentrating on the indices, the 'Stealth Bear Market' is being ignored," he said.
"What do you think the headlines would be saying if the major indices were 19.7 percent under the mid-April 1998 highs?" he asked.
The experts backed up their words with some strong stuff.
Ned Davis Research in Venice, Fla., says the average stock in its 7,736-stock data base has fallen nearly 20 percent since April 1998 -- a virtual bear market for a large number of stocks.
Richard McCabe, chief market analyst for Merrill Lynch, found that 23.6 percent of the New York Stock Exchange's common stocks and 22.7 percent of the Nasdaq market's stocks are below their summer-fall 1998 lows.
"The uptrend in the major market indices is misleading because it does not represent what the majority of stocks have been doing," he said.
People have been buying the big-name stocks, such as technology and consumer growth companies, in the hopes that the sectors would stand up to the downward pressures on earnings from the economic problems in Asia and Latin America as well as the slowdown in Europe.
"Investors went for the rapid and proven growth companies and ignored the medium and small stocks, which have been underperforming for more than a year," McCabe said.
"It's created a new breed of 'Nifty Fifty' -- the group of stocks that did well in the early 1970s when the rest of the market was having trouble," he said.
The Nifty Fifty stocks eventually went through a nasty period and they joined the bear market that had been dogging the other stocks since the late '60s.
Was it the smart way to pick stocks?
"It was not the ideal investment," he said. "A good, steady and healthy market is usually one where the vast array of stocks are doing well. But, when it's a narrow advancing market, the risk is the majority of weak stocks will ultimately bring down the minority of strong stocks."
Some investors may be reacting to the warning signs.
The emotional intensity of the bulls has tapered off over the past few weeks. The proof: The rallies have not generated a lot of new buying interest.
Also, mutual fund investors have reduced their stock holdings at the fastest pace since December 1987. Back then, investors were still running for the exits after the October crash.
The downsizing of stock portfolios started this summer. In July, investors redeemed shares from mutual fund companies at an annual rate of more than 20 percent, according to the Investment Company Institute, a Washington-based mutual fund lobbying group.
And, at the end of July, Fidelity Investment's Magellan Fund, the nation's biggest mutual fund with assets of more than $100 billion, cut its stock holdings to the lowest level in three years at 92.2 percent.
"A reasonable case can be made that what has been occurring simultaneously over the last 16 months is a bull market in a minority of large-cap issues and a bear market in a majority of mid- to small caps," McCabe said.
Has the bull market been built on shaky ground?
"There is little doubt, even in those partying 'tunnel vision' minds, that this bull market is being carried by a small pocket of stocks -- mostly big-cap technology stocks," Hays said.
The good times have been rolling for the tech sector, which includes International Business Machines Corp.
, Intel Corp. , Microsoft Corp. , among others. In fact, the technology sector has jumped 32 percent so far this year, after soaring 72 percent in 1998.
And, while the overall market was off 1 percent in August, the tech sector climbed nearly 6 percent, which explains why the market, on the surface, appears to be in a bull mode.
During the days of the Nifty Fifty, investors concentrated on a select group of stocks with extraordinarily high price-earnings ratios of 40 to 80.
"Their philosophy was to find stocks that had been able to provide consistent annual earnings gains, with the statement that you could buy these stocks at any price and know that in the future, you would be bailed out because of those persistent growth patterns," Hays said.
How different are things from the 1970s?
Cisco sells at 70 times projected earnings and Microsoft is at 60 times future earnings.
Hays said tech stocks now make up a huge 24 percent of the Standard & Poor's market capitalization, which is up from 13 percent in 1997. In 1990, it was just 7 percent.
Technology stocks, particularly the Internet group, are in a new era and for that reason, Wall Street has no idea where the P/E limits should be for many of those companies.
After all, the limits of a stock's P/E are largely decided by investors' expectations of earnings growth and risk. In the case of the Internet stocks, the sky seems to be the limit.
is selling at 200 times expected 12-month earnings.
"We believe the next two months will be very chaotic and take those perpetual grins off those who think the bull market is still alive," Hays said.
McCabe said the market sell-off could take place in October.
"It has the reputation of being a 'crash' month for stocks but October is also known as a 'bottoming' period because market weakness often sets the foundation for recoveries," he said.
"Then, there's the Y2K computer problem, which may provide the market with an excuse for a setback in the big-cap stocks as we get nearer to the end of the year," he said.
McCabe sees a correction in the Dow of 10 to 15 percent.
I hope AOL let me send this article. Sometimes it doesn't allow copying!!! It's about how the market really died a couple of years ago.
-- Mara Wayne (MaraWayne@aol.com), September 17, 1999
Dick McCabe flip flops. He had been very cautious on CNBC, and then Thursday, Sept 9 he said he was a bull. I can't figure this guy out.
He reminds me of Ralph Acampora - a neutral elf on Wall Street Week but a bull on CNBC.
I guess they both get to be right either way.
-- Rebecca Waldock (RWaldock@aol.com), September 18, 1999.