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Posted 3/27/2002
  Opposing view For the other side of the story, read "5 reasons I love this market" by Jon Markman. Related Articles How to spot a trend in a volatile market 3 reasons to sell a mutual fund – and 1 not to No one ever went broke ignoring the analysts
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Why you should still listen to the bears A six-month rally has put market pessimists on the defensive. But investors would do well to hear them out, as the danger of another downturn remains. By Scott Gerlach Forget about the troubled Nasdaq for a moment, and you might feel pretty good about the rest of the market. The Dow ($INDU) has tacked on 4% so far this year, and the broader S&P 500 ($INX) is flat. More important, three-quarters of listed stocks find themselves higher now than in the September trench six months ago.
Economic clouds have parted and market commentators sound decidedly bullish. Bears just don't get much press. Investors (and reporters) seem focused on recovery rather than risk, and the naysayers who believe the stock market could stagnate for some time -- or even revisit last year's lows -- aren't drawing much of a crowd. Where is the voice of dissent? A mid-March poll by Reuters found that head strategists at big Wall Street firms, on average, forecast a 14% gain for the S&P 500 by year-end. Several brokerages, including Lehman Brothers, Goldman Sachs and Salomon Smith Barney, now advocate planting 70% to 80% of a portfolio in the stock market. A few of the major firms -- Merrill Lynch, Banc of America and J.P. Morgan -- have scaled back their recommended stock allocation to as little as 50%. But the consensus is that stocks are the best place to be, even after a six-month run-up. "That would make it a good short," counters market historian Yale Hirsch, publisher of the "Stock Trader's Almanac." Hirsch wonders if investors too credulously accept that the ghosts of Enron (ENRNQ, news, msgs), recession and the net-stock bubble have been exorcised forever. He's cataloged the stock market's meanderings for decades, and he can't find much in the historical record to hint where we're headed. Hirsch just hopes we don't come to view stock speculation in the late 1990s as a mania on par with the 1920s stock market or the Dutch tulip fever of the 1600s. "Suddenly, people are ... expressing a bullish view that maybe it's all over, and everyone's chiming in and smiling," he says. "The truth of the matter is we don't really know." The bones bears pick Hirsch isn't really a bear, but rather an agnostic market biographer. He'll entertain the notion of a years-long stagnation. But he leaves predictions to the forecasters. Pessimistic market commentators these days run through a short list of four common themes:
"Investors have been sold a bill of goods over the past few years, and we're going to slowly but surely work our way back to reality," Newman predicts. "It will probably be a long bear market." Some $5 trillion of wealth that evaporated since the stock market peaked in March 2000 was about as big a percentage of the economy as was lost between 1929 and 1932, he says in a recent column. Since the stock market arguably exerts more economic influence now than it did 70 years ago, Newman adds, the apparent recovery in the economy could be just a head fake. What really sticks in Newman's craw is the level of insider selling. He wonders if the leaders of big U.S. companies, particularly technology companies, are liquidating their holdings before the pyramid scheme collapses. This trend, Newman says, suggests the accounting and disclosure worries that briefly gripped the market ought to stay in focus. A quick check of our insider trading tool confirms that, in the past 12 months, sales vastly outnumbered purchases by big-time holders of IBM (IBM, news, msgs), Siebel Systems (SEBL, news, msgs), Yahoo! (YHOO, news, msgs) and Microsoft (MSFT, news, msgs) (parent of MSN Money). Non-tech names have been sold heavily, too, including Citigroup (C, news, msgs), General Motors (GM, news, msgs) and McDonald's (MCD, news, msgs). To be fair, however, insiders have made large purchases at a few heavyweights: Dell Computer (DELL, news, msgs), AOL Time Warner (AOL, news, msgs) and others. Kinder, gentler Wall Street bears Away from the Street, pessimists freely swipe at the market. Closer to the action, however, prowls a more genteel bear. Not much talk here of a second Great Depression or another accounting-led market collapse. "We suggest that equity investors remain patient and look for more rewarding entry points into the market," writes Banc of America Securities strategist Tom McManus, who two weeks ago trimmed his recommended stock weighting to 50% from 55%. One common theme among the reports from less optimistic strategists is that the bear market hasn't really happened yet. The collapse that began in March 2000 truly crushed technology names. But the fact is, the carnage has afflicted a fairly narrow band of issues. The standard measure for a bear market in stocks is when they fall 20%, McManus notes. But six out of 10 Standard & Poor's industry groups have reached all-time highs since the Sept. 11 terrorism attacks. Rather than avoid the market, McManus suggests investors steer clear of the sectors that haven't yet been handed their comeuppance. In his view, the biggest offenders are industrial stocks and discretionary consumer goods. One first step toward filtering out "uncorrected" stocks is to screen for those that have reached five-year highs even during the bear market. Our Stock Screener finds 612 stocks with market values of at least $5 billion. But it shows that only about 100 of these hit their high-water mark sometime in the past 12 months. Some of these might be prospects for selling. How should a bear invest? Shorting the market is too risky for most investors; savings accounts and money-market funds still yield next to nothing; and the under-the-mattress option is really just a proverb. What to do?
No matter your point of view, there's one thing any investor absolutely must not do: Rely solely on the advice of a single guru, or a single class of expert. A herd mentality produced the late-‘90s stock-market mania. Investors trusted analysts and brokers over their own skepticism, and entire categories of investments -- bonds, dividend-paying stocks and for a time, companies with "real" earnings -- were snubbed. "The best thing investors can do is their own homework," Newman says. "If you listen to someone else, you will always make the mistakes that someone makes." 
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