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. Last Updated: 07/27/2016

Wall Street Believes Bear Finally Over




NEW YORK -- The latest upswing in the stock market, in which stocks have risen for four straight days after rallying through most of October, has finally convinced much of Wall Street that the bear market - if it was a bear market - is over.


The strength of the rebound and the fact that it has spread to small stocks as well as blue chips has turned many market watchers into believers.


"This is the real deal we've got going here," said technical analyst Robert Dickey of Dain Rauscher Wessels in Minneapolis.


The Dow Jones industrial average is up about 1,000 points, or 13 percent, since Oct. 8.


"It's very healthy to see smaller-capitalization stocks outperforming big caps," Dickey said. The broader the base of stocks participating in a rally, the better its chances of lasting awhile, he said.


The bearish camp still has its adherents, to be sure.


For one, third-quarter corporate earnings were generally weak, despite a few conspicuous "upside surprises." Given the tepid earnings growth, many stocks remain overpriced even at levels 20 percent or more below their peaks for the year, the pessimists say.


What's more, many analysts are suspicious about smaller stocks' ability to sustain their rally, given that many investors still view the small-stock sector as extremely illiquid - which became painfully clear amid the stocks' plunge between late April and early October.


Thomas Galvin, chief equity strategist at Donaldson Lufkin & Jenrette, said there is no question that we were - and still may be - in a bear market. But he argues that there are solid reasons to expect the recovery to continue.


Galvin noted that the average stock in the 6,000-stock universe of companies that trade on the New York Stock Exchange and the Nasdaq stock market fell 45 percent from its 1998 peak - a worse slide than in the 1990 bear market.


If you leave out the 2,000 smallest stocks, the drop was "only" around 35 percent - still well into bear-market territory, he said.


The market's abysmal performance for most of the year was masked by the strength in a few dozen huge blue-chip names that drive the major stock indexes.


Only when the blue-chip Dow plunged 512 points Aug. 31 did the fear in the markets become palpable to many investors - amid Russia's currency devaluation, continued chaos in Asian markets and fears that Latin America would fall next.


What has turned things around, Galvin said, is investors' sense that the worst of the global financial crisis has past, as major nations and central banks have acted to restore confidence.


Japan, he noted, reached a long-sought political consensus on solving its banking crisis; the Federal Reserve Board has twice cut interest rates; the Group of Seven leading industrial nations agreed on a financial rescue plan for Brazil, and the Fed engineered a private bailout of Long-Term Capital Management before the tottering hedge fund could trigger a market disaster.


Analyst Bernie Schaeffer insisted in a report Monday that there never was a bear market this year because the S&P 500 failed to close at a point more than 20 percent below its peak. Schaeffer sides with those who call the summer downturn a correction in a bull market.


Whatever you call it, the current rally is a selling opportunity, argues Richard Bernstein, chief quantitative strategist at Merrill Lynch.


What's keeping the market happy today is the expectation of repeated interest-rate easings by the Fed plus moderate corporate earnings growth.


The problem, said Bernstein, is you can't have both. While the central bank may indeed cut rates again at its Nov. 17 meeting, he said, the other item on the wish list - rising profits - is looking less likely.