Has Market Finally Topped Out? Some Experts Think So : Growing Number Joins Bears in Tug of War With Bulls After Dow’s Drop From April 6 High

The bull market that began in 1982 has given a joy ride to millions of investors, analysts and money managers like Richard H. Fontaine and Robert R. Prechter. But Fontaine, a mutual fund manager, thinks the ride is over. Prechter, editor of a widely followed stock newsletter, thinks more fun and profit are still ahead.

“The bear market has begun,” declared Fontaine, citing fears of higher interest rates, renewed inflation and historical evidence suggesting that stock prices are already too high. The record high of 2,405.54 on the Dow Jones average of industrial stocks, set April 6, “will turn out to be the high point for this market,” said Fontaine, president of T. Rowe Price Capital Appreciation Fund in Baltimore.

Prechter, on the other hand, said investors have yet to demonstrate the euphoria and mass speculation that signaled the end of bull markets in the past. “It’s way too early to call a market top,” said Prechter, editor of the Elliott Wave Theorist in Gainesville, Ga. He predicts that the Dow index will go as high as 2,700 this year and 3,600 next year.

The differences between Fontaine and Prechter represent a tug of war between bulls and bears on Wall Street that has intensified since the Dow index has fallen 5.2% from its April 6 high. A small but growing number of market watchers say a bear market has already begun.

While stock prices may stage rallies such as this week’s, when the Dow average gained 45.03 for the week to close at 2,280.40 Friday, the market as a whole will not go much higher than the April 6 top, these pessimists say. The decline, they say, could be a 1929-style crash but more likely will be a gradual, slow decline, interrupted by mini-rallies.

“The market has far more potential on the downside than on the upside,” said Gerald Appel, president of Signalert Corp., a Great Neck, N.Y., money management firm. The bear market “could last for many, many months, if not years,” he said.

The tug of war between the bulls and bears is easily seen in the wild swings in the Dow index in recent weeks. As recently as April 22, for example, the Dow index plummeted 51.13 points--its fifth-largest decline ever--just a day after leaping 66.47 points, its second-biggest gain ever.

Of course, no one really knows for sure if the bull market has ended. The proclaimers of a bear market could be wrong, or at least premature. Some bears, in fact, thought the market was running out of steam late last year, failing to foresee the phenomenal stock rally of early this year.

Many analysts contend that while the bull market will end eventually, it has not done so yet. They say the market will continue to draw strength from Japanese and other foreign investors who see U.S. stocks as cheap relative to foreign equities. Stocks also have been helped by the tremendous amount of cash available for investment worldwide, the result of expansionary monetary policies in the United States and elsewhere.

Also helping will be prospects for stronger U.S. economic growth and improved corporate profits, bulls say. They also cite evidence from the bull markets of the past 30 years showing that rising interest rates did not immediately cut stock prices.

Thus, they say, the fall in the Dow index since April 6 is merely part of a long-predicted and overdue correction and that stock prices will recover and set new record highs.

Some bulls also contend that the growing pessimism among investors and money managers is strong evidence that the bull market indeed is not over. Market tops, including the 1929 peak that preceded the great stock market crash and Depression, are characterized by widespread euphoria and speculation, where all stock market players are optimistic and fully invested in stocks, bulls say. That leaves no money on the sidelines to buy more stocks and propel prices still higher.

“Humans are humans, they always get euphoric. You’ll see that when the market tops out,” said Peter H. Hackstedde, editor of Bullish Consensus, a Pasadena newsletter that polls investment advisers.

But bears say the market has already seen behavior similar to euphoria. For example, during the first-quarter rally this year, the more speculative stocks of smaller, lesser-known companies that trade over the counter rose more than blue chip stocks. Over-the-counter stocks had under-performed blue chip stocks for most of the bull market that began in August, 1982.

Other signs of speculation include recent increased buying of new stock issues and the growing use of stock options, stock-index futures and other speculative investment vehicles, bears say. They also cite the proliferation of stock and bond mutual funds, which are growing at the rate of one a day and now number more than 1,800, more than the number of stocks traded on the New York Stock Exchange.

Bears also debunk the argument by bulls that the excess supply of money in the financial system, particularly among foreign investors, will continue to propel stocks upward.

“All you need is a bear market to watch this liquidity evaporate” through losses in the stock market, said Geraldine Weiss, editor and publisher of Investment Quality Trends, a La Jolla, Calif., newsletter. Faced with sluggish or declining stock markets, foreign and domestic investors will switch out of stocks and back into Treasury bills, money-market funds, certificates of deposit and other fixed-income investments that pay more than dividend payments on stocks, with less risk than stocks.

Bears also say that investors have bid up stock prices without paying sufficient attention to the risk of a major financial crisis, a recession or other calamity. Stock prices are high in part from expectations of large improvements in corporate profits, leaving little room for disappointing earnings, bears say.

The bears make perhaps their strongest case in citing historical data about how certain measures of stock values now are near levels that characterized past market peaks.

One such measure is the price-earnings ratio: stock prices divided by their earnings per share. The average price-earnings ratio for issues in the Standard & Poor’s index of 500 stocks hit about 20 at the market’s peak in early April, a level that in the past eventually led to a bear market, pessimists say.

Not the Whole Story

Another measure is stocks’ dividend yields, which show the percentage rate of return on a stock from its dividend payment. The average yield for stocks in the S&P; 500 had declined to just under 3% at the early April peak. Such a level signaled market tops in 1959, 1961, 1966 and 1973, bears say.

Bulls counter that such measures do not tell the whole story. Past bull markets, they say, often continued for months after such levels were reached.

Not sure about which arguments to buy, many investment experts are simply reducing their exposures to the stock market, waiting for some clearer direction.

“I’m neither a bull nor bear. Right now, I’m a chicken,” said Charles Allmon, a mutual fund manager and editor of Growth Stock Outlook, a newsletter based in Chevy Chase, Md. “This is what I call a P. T. Barnum market: There’s a sucker born every second.”

“We’re heading toward (a bear market), but I don’t think it’s started yet,” said Martin E. Zweig, a widely followed Wall Street guru and chairman of a New York-based mutual fund bearing his name. Instead of entering a bear market, Zweig said, the market has entered a “trading range” where the Dow index may move between 2,100 and 2,500. The bear market will probably follow that, he said.

Many individual investors also are growing cautious. Gerry Fox, a 56-year-old semi-retired businessman and investor in San Diego, said he is still bullish. However, he said, he has reduced stocks from 60% of his investable funds to 35% since last September.

“I’m not taking any chances,” he said.