Market Watch : How Investors Can Tell When the Bear Is Dead

There are many smart investors sitting out the bear market of 1990, waiting until the stock market hits bottom before investing again.

The obvious questions: Where is the bottom, and how will investors know when the market gets there?

Most bear markets are plagued by mini-rallies, often called “sucker rallies” because of their ability to suck investor money in before another lurching decline.

The ability to distinguish sucker rallies from real recovery is worth cultivating. As might be expected, it is not an exact science.

But there are some indicators that financial experts use to forecast upswings. Although they are not hard and fast, here are some of the more prominent:

* Interest rates, particularly the federal funds rate, which is the rate banks charge each other for overnight loans.

Ron Rough, research director for Schabacker Investment Management Inc., says that when a moving average of the rate continues to drop, it’s a sign that the Federal Reserve will allow enough money to circulate to try to boost the economy, which usually strengthens demand for stocks.

The central bank has pushed the rate lower through much of the fall, but more slowly than many analysts would like.

* Investor sentiment: The more pessimistic investors are, the better the outlook for the market. That contrarian theory is based on the idea that when investors are most negative, most have already sold their stocks.

Michael Burke, editor of Investors Intelligence newsletter, points out that investment advisers he surveys hit a bearish low in September, when 56% were bears and 27% were bulls. Now he finds 50% are bears and 40% are bullish.

But Rough points out that in a market such as the current one, where psychology reigns, the bears can dominate for a while before the momentum shifts. “It can stay negative and depressed for a long time,” he said.

* Technical factors: There are a slew of these, and they are not all pointing in the same direction.

Martin Pring, editor of the Pring Market Review, is keying his outlook to one ratio: that of total stock returns to bond returns, which recently began to reverse a 16-year up-trend. That means “the super bull market is over now, and bonds are the favored vehicle for the long term,” he said.

But Pring concedes that other technical indicators are hinting at short-term stock market improvements. Although overall market averages keep hitting new lows, the number of individual stocks reaching new lows is shrinking. That’s a bullish sign.

Investors Intelligence’s Burke says those firms whose lows keep inching up are usually the growth leaders in the next bull market.

* The economy: Generally speaking, you don’t want to buy stocks until the trough of a recession. But since government indicators lag, by the time investors have statistical validation of a recession, it could be too late. Schabacker Investment’s Rough suggests looking at outlook surveys released by the nation’s purchasing managers.

* Special one-time factors: Of course, most analysts are watching the Middle East and the price of oil. Though informal gossip suggests “buy when the first shot is fired” because it will signal resolution, Rough says a peaceful solution will be more bullish for stocks because it will more likely portend lower oil prices.

Rob Brown, market analyst at Ferris Baker & Watts, is watching banking stocks closely. “The financial stocks have been the worst performers; that seems to be where the cancer is in this system.”

The most impressive part of last week’s rally, says Rough, is that the financial index turned up. If bank stocks bottom out again, it would be a very bad sign, he says.

* Stock fundamentals: Analysts traditionally look at price-earnings ratios and yield information to pick the market’s bottom. Low ratios and high yields are a sign that prices are bottoming and on the way up.

Although both signs are present, they are not at all-time lows or highs, indicating to some analysts that the bottom has not been reached.

“We’re still cautious,” says Rough. “People with guts could get back now and end up heroes, but that’s not the way we think. We’re telling people to keep their powder dry for a while longer.”