Which Way Will Wall Street Go--Bull or Bear?

Wall Street’s spectacular rebound Tuesday will help calm worries about an imminent market meltdown. But will it be enough to put the bulls back in the driver’s seat?

The Dow industrials leaped 82.06 points to 3,675.41, retracing about one-fifth of the index’s total loss from its ’94 peak to Monday’s close.

Given the horrendous selling over the past week alone, the market was clearly ripe for a snapback, traders noted. Once the bond market settled down on Tuesday, bargain hunters poured back into stocks across the board.

But will the buyers keep coming in the short run? To bet on that, you have to believe that the market massacre of the past week wasn’t enough to turn the tide of investor sentiment against stocks. If the majority of institutional and individual investors have quietly grown cautious or outright bearish about the market, new rallies could fade quickly, buyers’ willingness to risk capital in stocks will ebb, and the bull market born in 1990 will soon be history.

Granted, there are plenty of good arguments that the past week was simply the tail end of a classic 10% “correction” in stock prices, the kind bull markets are supposed to endure periodically.

The catalyst for much of the selling has been the surge in bond yields to 15-month highs, a reaction--or overreaction--to expectations of continuing strong economic growth. The bullish case is that growth moderates, inflation stays low, and long-term interest rates ease or at least stabilize. Investors will then focus on improving corporate earnings, and stocks will be off to the races again--or so the bulls hope.

But that assumes that the frightening volatility in stocks and bonds since late January, after two years of record low volatility, hasn’t changed investors’ view of the risk in those markets. It also assumes that investor sentiment hasn’t been significantly altered by the knowledge that the Federal Reserve Board is pursuing a tighter-money policy for the first time in five years, which will inevitably mean higher short-term interest rates.

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Gauging investor bullishness or bearishness in the aggregate is impossible, of course, so Wall Street has come to rely on a handful of regular surveys of small investors, money managers and independent investment newsletter writers. And not surprisingly, those surveys show bearishness on the rise as markets have been jolted.

The latest weekly investor survey by the Chicago-based American Assn. of Individual Investors showed that the percentage of respondents who are bearish on stocks leaped to 44% last week from 34% in mid-March and just 24% in early February. In contrast, just 23% of respondents are bullish now, and 33% are neutral.

When this week’s Investors Intelligence survey of investment newsletter writers is released today, it’s expected to show a sharp rise in bearishness, from last week’s 39% (versus 42% bullish and 19% expecting a mere correction).

Typically, Wall Street loves to view these surveys as “contrarian” indicators. In other words, when the majority of investors or advisers are bearish it may actually be a bullish sign, because high bearishness may indicate there are plenty of people (and dollars) available to enter the market.

On the flip side, when the bulls dominate it may indicate that most people are already in the market, and that there are relatively few idle dollars left to push stocks higher.

But there are times, experts warn, when bad news is bad. “What you have to ask is whether you’re seeing (growing) bearish sentiment in a bull market, or in a bear market,” says Bernard Schaeffer at the Investment Research Institute in Cincinnati. Sentiment can waffle a great deal within a bull market, and that’s when buying on dips--in prices and in investors’ short-term mood swings--can pay off, Schaeffer says.

When the market trend has turned, however, and the bull cycle has peaked, rising bearishness tends to feed on itself, Schaeffer notes.

For examples of how vicious and long-lasting such sentiment shifts can be, you need only look at the steep declines in many drug, food, financial and utility stocks over the past year. Once investors decided they no longer wanted to own these stocks, and prices began to slide, the attitude toward them grew increasingly bearish--and for the most part has stayed that way.

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Last December, it was easy to argue that utility stocks, for instance, had been severely clipped from their 1993 highs, and that they looked like bargains. But investors’ interest in the stocks continued to wane, and the result has been further compression of the stocks’ prices, in some cases to four- or five-year lows.

Has the bull market as a whole now entered the same phase? It’s too early to tell. Tuesday’s rally was encouraging, not only for its breadth but also for the heavy buying of the industrial, technology, transportation and other economy-sensitive stocks that have led the market since fall, and which would be expected to lead any surge to new highs.

Still, it’s time to be vigilant for signs that investor sentiment toward stocks has turned--that people are thinking much differently than they have since 1990 about the market’s potential. If bearishness in investor surveys increases and stays high, yet stocks fail to get much of a lift over the next month or so, it will be a strong clue to stop viewing bad news as good news for the market.

* MAIN STORY: A1

Suddenly, Too Many Bears?

A weekly survey of small investors by the American Assn. of Individual Investors showed 44% were bearish as of last Thursday, the highest bearish reading since last May. The rest were bullish or neutral on the market.

Bearish sentiment reading, biweekly except latest 1993 April 9: 29% April 23: 30% May 7: 34% May 21: 45% June 4: 28% June 18: 43% July 2: 38% July 16: 34% July 30: 30% Aug. 13: 34% Aug. 27: 38% Sept. 10: 40% Sept. 24: 32% Oct. 8: 34% Oct. 22: 28% Nov. 5: 32% Nov. 19: 35% Dec. 3: 35% Dec. 17: 29% Dec. 31: 28% 1994 Jan. 14: 31% Jan. 28: 34% Feb. 11: 24% Feb. 24: 29% March 11: 37% March 24: 34% March 31: 44%

Source: AAII

The Big Breakdown

If investors turn as negative on the broad market as they have on some of their once-favorite stocks, the extent of the market’s decline could be shocking. How some leading stocks have crashed over the past year:

1993 1994 Stock high high Tues. BankAmerica $55 1/2 $48 7/8 $39 3/8 Bristol-Myers 67 1/4 59 7/8 50 Consol. Edison 37 3/4 32 3/8 29 1/4 Countrywide Credit 35 28 5/8 22 1/2 Kellogg 67 7/8 58 48 7/8 Merck 44 1/8 38 30 1/8 Merrill Lynch 51 1/4 45 5/8 37 1/4 NationsBank 58 50 7/8 46 1/4 Philip Morris 77 5/8 61 49 SCEcorp 25 3/4 20 1/2 16 1/2