Wall Street Fights, but Bear Advances

Take your pick. This is:

* Not a bear market because the Dow Jones industrial average isn't down 15% yet.

* Not a bear market because the Standard & Poor's 500-stock index isn't down 20% yet.

* Unquestionably a bear market because too many people are using a lot of silly numbers to convince themselves otherwise.

With the Dow down 395 points from its all-time high, investors are desperately trying to decide whether stocks are finally reaching a bottom or whether the worst is to come. Much of Wall Street continues to be extremely reluctant to embrace the idea of a further decline.

A better strategy would probably just be to get ready for it because the odds of a frightening, sustained selloff are increasing daily.

Forgetting the fundamentals for now--the Mideast crisis, the weak economy and rising long-term interest rates--one of the most dangerous bullish arguments is that "it's really not so bad; stocks are holding up reasonably well."

Indeed, compared to most foreign markets, the Dow practically appears robust. Tokyo's Nikkei index has plunged 32.4% to 26,297.84 from its peak earlier this year. West Germany's DAX index tumbled 5.2% on Tuesday alone to a new 1990 low.

In contrast, the Dow, at 2,603.96 after Tuesday's 52.48-point drop, is down just 13.2% from its mid-July peak.

But the deeper you look into the U.S. market, the worse it gets. Outside the Dow's 30 stocks, "If you own 40 or 50 (other) stocks, you know it's a bear market," says Richard Russell, editor of Dow Theory Letter in La Jolla. If you own over-the-counter stocks, in particular, you've had your head handed to you. The NASDAQ OTC composite index is down 21.8% from its all-time high reached last October.

Despite that damage, Wall Street is still embroiled in a semantic argument over what truly constitutes a bear market. We have the National Bureau of Economic Research to officially call a recession, but there's no official body to decree that a bear market has arrived.

Some analysts say a bear market is a decline of at least 15% in the Dow. Standard & Poor's Corp. says a bear market doesn't begin until its 500 loses about 20% of its value. Since the S&P; is off just 12.8% from its all-time high, "we're not ready to call it a bear yet," says Arnold Kaufman, editor of S&P;'s Outlook newsletter in New York.

Russell thinks that's ridiculous. "Some people will call a cow a rabbit too," he says. Ask the people closest to the market--the traders--what they think, and you don't get much argument. "I think it is the bear," says Len Hefter, OTC trading chief for brokerage Jefferies & Co. in Dallas. "Definitely, the sentiment has changed. . . . The entire scenario of the market has deteriorated."

Of course, it's true that the stock market always needs something to worry about. In that context, the bulls can make the case that the potential for an American-Iraqi war, higher inflation from higher oil prices, higher interest rates from a ballooning federal budget deficit and outright recession are just more obstacles that the market will hurdle on its way to new highs.

But it's also true that such obstacles often take a long time to hurdle, and in the meantime the market can go much lower. That's what constitutes a bear market. There have been plenty in history, and at least seven since World War II. Why assume we've seen the last?

For many investors, the problem may be the crash of October, 1987. It was misleading because it was over so quickly. In contrast, look back to the last major bear market. It ran from November, 1980 to August, 1982, and took the S&P; index down 27.1%. Other post-war bear markets shaved far more than that off the S&P;, as the accompanying chart shows. So the S&P;'s current 12.8% loss suggests that things could get much much worse.

But will they? Aside from the economic fundamentals, the backdrop for this market decline is scary for technical reasons. Analysts agree that the slide in stock prices so far here, in Japan, Germany and elsewhere has mostly come about because there are few buyers rather than because too many people are trying to sell. Stocks hit air pockets because no one steps up to buy.

In Japan, for example, "there hasn't been a real blow-off," says George K. Hersh Jr., technical analyst at Daiwa Securities America in New York. "The big moves downward have been on extremely low trading volume."

That begs the question: What will happen if investors worldwide finally reach the capitulation stage and try to bail out in a hurry? "That's a very frightening question," Jefferies' Hefter admits.

Richard Carney, of Los Angeles-based money manager Cramblit & Carney, has been bearish since late spring and believes that the bulls who say a bear market can't happen now are engaging in self-deception. Look at history, Carney says. This bear market won't end until 1991 or 1992, he says--not until "no one even wants to read about stocks anymore."

WHEN THE BEAR COMES CALLING

Here's how the Standard & Poor's 500-stock index plunged in the seven bear markets that have occurred since World War II. S&P; doesn't officially list the 1987 crash as a bear market because of its brevity. So far in 1990, the S&P; index is off 12.8% from its peak.

Duration of Drop in Market peak bear market S&P; 500 August, 1956 14 months -21.6% December, 1961 6 months -28.0% February, 1966 8 months -22.2% November, 1968 18 months -36.1% January, 1973 21 months -48.2% September, 1976 18 months -19.4% November, 1980 21 months -27.1%

Source: Standard & Poor's

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