Strategists Debate Bullish Signs After Recent Stock Market Gains

How do you know when a bull market is a bull market? That’s the big question on Wall Street these days.

The three major U.S. stock indexes have rebounded sharply from their Sept. 21 lows--nearing or surpassing the 20% move required by Wall Street’s unofficial definition of a bull market--but many investment pros remain unconvinced that happy days are here to stay.

“This doesn’t feel like a bull market. What this feels like is a recovery from an oversold position,� said Dong Zhang, manager of the Phoenix-Oakhurst Growth & Income fund in Scotts Valley, Calif. The indexes are still down significantly year-to-date, he noted, and even further from their spring 2000 peaks.

The Nasdaq composite index, the Dow Jones industrial average and the Standard & Poor’s 500 index have risen 32.1%, 20.2% and 18.3%, respectively, after the quick but sharp sell-off after the Sept. 11 terrorist attacks. But for the year, they still are down 23.9%, 8.2% and 13.5%, respectively.

Several previous rallies since the market’s long collapse began in spring 2000 have sputtered, strategists note, and the market remains at the mercy of the U.S. economy and unpredictable world events.

“I wouldn’t want to confuse a very tradable rally with a new bull market,� said Bill Ryder, chief quantitative strategist at First Union Securities in Richmond, Va. “The short-term trend is positive. With any luck, it will turn into a long-term trend.�

Indeed, bull markets may be a matter of duration as well as degree.

Barron’s financial dictionary defines a bull market as a “prolonged rise� in prices, usually lasting at least several months. This advance has been swift, sending the Nasdaq past the 20% threshold weeks ago, but so far it has lasted just two months.

An even stronger Nasdaq climb went kaput in the spring. From early April through late May, the Nasdaq soared 41.2%, but that rally faltered as the economic downturn deepened.

There is no official definition of a bull market. Adherents of the “Dow Theory� believe that a bullish trend is only confirmed when both the Dow industrials and the Dow transportation average reach new highs in tandem, and other statisticians have created their own formulas.

Regardless of what the trend watchers say, strategists such as Dennis Ferro, chief investment officer at Evergreen Funds in Charlotte, N.C., note that economic data and corporate earnings reports have yet to signal fundamental improvement in the U.S. economy.

“To know you’re in a bull market, you need to see earnings validation,� Ferro said. “What we have is an impressive bounce off overly depressed levels.�

Along with the cloudy economy, the post-Sept. 11 market also faces “a high degree of event risk,� as Ryder of First Union Securities put it. “In mid-summer we were only worrying about the crummy economy and earnings being revised downward,� he said.

Last week’s New York plane crash showed how jittery the market can be: Stocks plunged early in the day on fears of terrorism, then recovered as the investigation began to focus on accidental cause.

Strategists note, however, that bull markets invariably start at times like these--when the economy looks dismal and uncertainty abounds.

“What matters is not whether some index is up 20%. What’s important is that when the Fed is cutting interest rates, when investors are discouraged and the economy is weak, that’s usually a good time to be buying stocks for the long term,� said Alan Skrainka, chief market strategist at brokerage Edward Jones in St. Louis.

The Federal Reserve has cut interest rates 10 times this year in a bid to wake up the economy.

Skrainka said investors who look suspiciously at this rally may be making a mistake. “That’s how you end up buying high and selling low,� he said.

“When I started here [at Edward Jones] in 1982, everybody was saying, ‘The economy is weak, blah-blah-blah,’ and now the rest is bull-market history,� Skrainka said. “At the start of every bull market there is widespread disbelief. That’s because people are reading today’s newspaper, but the stock market is reading the paper six to nine months from now, when things are better.�