IS A BEAR Market Growling?

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Is a Bear Market Growling?

By Drew Parkhill , CBN News

-- Is the stock market topping out? Have we seen a major peak in stock prices?

More than any time since at least 1990 (and perhaps even since 1987 or 1973), the odds are growing that the answer to such questions is "yes." The evidence is not yet absolutely convincing, but it's heading in that direction. We could be facing a potentially serious bear market (a time where the primary trend for stocks is down, not up) in the relatively near future.

What has brought us to this point? For one thing, the stock market itself is falling apart internally.

For nearly two years now, since mid-April of 1998, more stocks have been falling in price than rising (in the language of market analysts, this is called "a falling advance-decline line"). You may wonder how this can be, since popular stock market indices like the Dow Jones Industrial Average, Standard and Poor's 500 and Nasdaq Composite have all kept going up during this time. The answer is simple: those averages are designed to reflect the performance of big companies, rather than the overall market.

A bull market (i.e., when stock prices are steadily rising over time) is characterized by several attributes, one of which is that the price of the majority of stocks is climbing. But at certain times throughout history, the majority of stocks have started to fall off in price, even though the popular averages have kept climbing, because the stocks of bigger companies kept rising. Market analysts have a phrase for this: "The generals are leading, but the troops aren't following." (In the language of market technicians, it's called a "negative divergence" -- meaning that while the stocks of a few companies are still going up, the majority of stocks are diverging, and heading down). Such variances in the past have usually been resolved when the generals (i.e., the stocks of big companies) follow the troops (the rest of the market), and head down. At that point, the illusion of an ongoing bull market is finally shattered, and even the public realizes what the professionals had known for some time: the stock market is in trouble.

So, the fact that most stocks have been going down for nearly two years while the popular averages have gone up is likely a negative for the market. Bulls have argued, with some justification, that perhaps the market could experience something called a "rotating correction," where the majority of stocks go down or sideways while the Dow itself never goes down substantially. If this proved to be the case, then the majority of stocks could start heading up again at some point, and the bull market would hit major new highs.

However, this scenario has looked less and less likely in recent weeks, since the advance-decline situation has been steadily getting worse, not better.

A second major problem: possible rising interest rates. The benchmark 30-year Treasury bond rate rose from just under 4 3/4 percent in late 1998 to the 6 1/2 percent area recently. While long rates may have topped out, the Federal Reserve is making clear that it intends to keep raising short-term rates to prevent possible future inflation. That poses two problems for the stock market.

First, if so many stocks are going down, why not just buy bonds? You can get a six or seven percent return, with less risk than stocks. Second, if short-term interest rates rise above long-term interest rates (in this case, because of the Fed), that's usually a signal for an economic slowdown or recession -- a time when you don't want to own stocks. (Incidentally, the technical name for when short-term interest rates are higher than long-term interest rates is "inverted yield curve." Now you'll know what they're talking about the next time you hear that phrase used in the financial media).

Another possible negative: the extraordinary rise in tech stocks in recent months. These stocks haven't just gone up -- they've gone straight up. Such rises are not sustainable, although they can go on longer than one ever thinks they will.

Another warning sign: some of the market's former leaders, like Microsoft and General Electric, are not looking too healthy these days.

In addition to the above problems, various other negative technical factors plague this market as well -- indicators far too esoteric to go into here.

The next few months will probably tell us a lot. On the first day of this year, I said on The 700 Club that I expected a correction in February. Here we are, and the Dow has come down well over the 10 percent required as an official "correction." I don't think this decline is over yet; I believe the market has yet to hit bottom. One point to watch will be how far down the tech stocks will go when they finally start to fall.

After the market hits its final bottom, probably some time in the next few months, we'll get the normal post-correction rally. The strength of that rally will be very important. It will go a long way toward telling us if the next major move will take us significantly higher -- or lower -- in the market. Which will it be: bull? Or bear?

End.

In recent years, CBN News Financial Editor Drew Parkhill predicted Dow 10,000 and the "mini-crash" of 1997. And he never lets us forget that he's been wrong, too.



-- Zdude (zdude777@hotmail.com), February 24, 2000

Answers

I agree that we are in a crucial phase this week and next. If the market tests and doesn't really cross the 10,000 level, ok. But I think that it will cruise right through it...and continue downward for a while. Yeah, a rally or two...followed by a falling market to a level below the start of the rally. The quasi-technical term for this kind of a rally is a "sucker rally."

The real key will be what is happening in 3-6 months.

-- Mad Monk (madmonk@hawaiian.net), February 24, 2000.


Am I wrong, or is it good that the market is going down since up is unsustainable. Along those lines, I'd like to see the NASDAQ drop. I'm not being mean, I don't think, but fantasy frightens me.

-- Mara (MaraWayne@aol.com), February 24, 2000.

When people stop bidding up Tech stocks any higher, the NASDAQ will stop rising, then fall. It is not likely that under those circumstances money flows back into the DOW which itself now contains more Tech stocks than ever. So NASDAQ falls and DOW falls FURTHER, SPX falls also. That is when the pain begins.

It could be triggered by external events rather than investors coming to their senses. Right now, everyone still buys on dips and shifts into momentum stocks. Won't go on forever. CAN'T go on forever.

-- W (me@home.now), February 25, 2000.


Light crude oil closed in New York today at $29.97, the highest that I can remember since the Gulf War. Whether it is due to OPEC production controls or Y2K disruptions, the world economy cannot sustain such ridiculous stock multiples with $30+ oil. The oil price is already squeezing the truckers, airlines, and northeastern states. How long will it take until it visits a gas station near you? Look for profit disappointments and disastrous price drops. The brokerage analysts intentionally keep profit targets low to make meager earnings look exceptional when they exceed the projections. This shell game cannot last.

-- Mr. Adequate (mr@adequate.com), February 25, 2000.

I was doing some consulting work over in Silicon Valley this week and stopped at a fairly upscale shopping center on my way back home to the beach. Maybe it's because I am not out as much and lead a more quiet life, but I felt almost overwhelmed at the amount of stuff on display for purchase. Who in the world is buying all of this? Are there more J.C. Penney's on the way. The inventory overstock is amazing!!

On my way home I stopped and paid $1.48 for 87 level self service unleaded at a cheapo gas station. Granted I am talking Northern California, but that is high.

Put those two "hmmms" together and I makes me leary about the market.

-- Nancy (wellsnl@hotmail.com), February 25, 2000.



I think the Bear has finally come out of hibernation. My "puts" have been patiently awaiting. Let the games begin!

-- NoJo (RSKeiper@aol.com), February 25, 2000.

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