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Analysts Are a Little Bit Bullish


There's no shortage of grim news in the markets: escalating layoffs, profit shortfalls, and shrinking capital spending. The economy shrank in the third quarter, too, and is forecast to contract further. To top it off, investors are more than ever soured: The Securities Industry Assn. says that 22% of investors, the most in seven years, think that next year will be "bad" or "very bad" for owning equities.

But all that may really be good. Wall Street pros, thinking that wholesale negativity is a contrarian indicator, couldn't be giddier. "Now, just a hint that things are getting better and there's confetti in the streets," says Timothy J. Leach, a chief investment officer at Wells Fargo & Co. Crossing the technical threshold for a bull market, the Dow Jones industrial average gained 20% through Nov. 20 from a Sept. 21 low. The Standard & Poor's 500-stock index rose by 18%; while better-than-expected earnings from tech bellwethers, such as Hewlett-Packard Co. (HWP), boosted the Nasdaq composite index by 32%.

CAUSE FOR OPTIMISM? Wall Street bulls say the trend is for real. Small company stocks, which often lead recoveries, have outdone the S&P since September. Since March, growth stocks have risen faster than value stocks. A market rising despite bad news "is the classical early stage of a new bull market cycle," says CIBC World Markets strategist Subodh Kumar. He credits the Federal Reserve's 10th interest-rate cut on Nov. 6, bringing the federal funds rate to 2%--the lowest since 1961--for sustaining the turnaround. He also forecasts better earnings growth over the next 12 months and renewed tech spending. What's more, there's a record $2.23 trillion in money-market assets just waiting to pounce.

True, some of the most active trading has been in thrashed tech stocks--Global Crossing, Lucent Technologies, EMC, and Northern Telecom--which could get taken back down. "But even though you are going to get corrections, the bigger picture is that you are not going back to new lows," says Hersh Cohen, a fund manager overseeing $8 billion at Smith Barney Asset Management. Even amidst the panic after September 11, "the market went only 10% below its spring lows," says Cohen. "If the bear market was going to continue, it would have kept going lower."

A few bold bulls are calling a bottom. Birinyi Associates Inc., a research firm, says institutional investors are making bigger bets, heralding a market turn. "We're bullish, with a lower-case b," says Jeffrey Y. Rubin, research director. He cautions against relying on conventional indicators of a market bottom: Gauging how many stocks go up against those falling--advance/decline ratios--failed to call bottoms in 1970, 1982, and 1990. Waiting for a massive sell-off may not indicate a trough either, or even be in the cards.

The linchpin in the markets' recovery is still earnings. And while they're nothing to write home about yet, S&P corporate profits were higher in the third quarter than in the second, and they beat consensus estimates, too. If the trend sticks, the rise in stock prices will get fundamental support. And investors will have every reason to feel good again. By Mara Der Hovanesian in New York


We Almost Lost the Nasdaq
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