Bulls Still Head and Shoulders Above the Bears

The great 1990s stock bull market--also known as The Thing That Wouldn’t Die--wrote another entry in the record books on Wednesday, with new highs in the Dow industrials, the Standard & Poor’s 500 index and the Nasdaq composite.

The S&P; 500 already is up 7.5% year to date, which is one-half to three-quarters of the return the most optimistic Wall Streeters believed the S&P; could achieve for the full year.

Is this nutty? The easiest call any market seer can make today is to say that stocks are pushing the historical envelope in terms of fundamental valuation--that is, share prices relative to earnings, underlying asset value, dividends, etc.

But so what? You could have said the same thing about this market for most of the last three years, as it has climbed ever higher.

It may well be that many stocks now are rising for only one basic reason: because they can. In other words, so long as investors assume the market can go higher, they will buy it, making a continuing bull market a self-fulfilling prophecy.

That is a dangerous justification for being in stocks, of course. (“It’s nothing but a bubble!” the bears say, and they’re probably right.) But if that’s all we have, the key question is whether the momentum powering this bubble phase of the 7-year-old bull market is gaining strength or flagging.

That’s a question not for analysts who worry about fundamentals, but for market “technicians”--the chart watchers who try to predict the market by studying how it acts from day to day and month to month.

At brokerage Salomon Smith Barney, the chart watchers made a great call on Feb. 6. The pattern the Dow Jones industrial average had charted over the previous six months took the shape of a “reverse head-and-shoulders”--with the Dow’s Oct. 27 low (the day of the 554-point plunge) forming the top of the head.

The brokerage’s call on Feb. 6: The Dow, then at 8,117, looked poised to surge through 8,400 by late February, then head on to 8,600 and eventually 9,600.

So far--with the Dow at 8,457.78 on Wednesday--so good.

Susan Stern, one of Salomon Smith Barney’s technicians in New York, says that from a chart watcher’s standpoint, this market advance looks quite robust.

For example, while the bears insist the market is being powered by only a handful of big-name stocks like General Electric and Microsoft, the technicians note that 466 issues on the New York Stock Exchange hit new 52-week highs last week, while just 38 hit new lows.

“I think we’re in good shape,” adds Eugene Peroni, veteran technical analyst at brokerage Janney Montgomery Scott in Philadelphia.

He concurs that the market’s action between August and mid-January, volatile and frightening as it may have been, was the equivalent of a “launching pad” for the current powerful surge in the bull market.

What’s more, the market’s constant rotation among various stock groups--with banks and technology shares sinking last fall, for example, while utilities and real estate investment trusts gained--is a healthy sign for the bull’s longevity, Peroni insists.

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Likewise, Richard Eakle, head of technical-analysis firm Eakle Associates in Fair Haven, N.J., likes the trend in trading volume, which has calmed down somewhat in recent weeks.

“An explosive rise in trading to 800 to 900 million shares per day [on the NYSE], occurring on flat prices, would suggest exhaustion of the current rebound,” Eakle says. But as it is, daily volume in the 600-million-share range indicates “more cautious commitment of reserves [by investors] that could continue for some time.”

Finally, there is investor sentiment. We know that U.S. consumer confidence in the economy is at a record high. But one oft-quoted measure of investor sentiment--Investors Intelligence’s weekly survey of independent market newsletter writers nationwide--shows just 46% now bullish, well below the 60%-plus readings that often accompany market peaks.

(The investor-sentiment reading is a “contrarian” indicator, meaning that rampant bullishness usually signals fewer investors left on the sidelines to lift the market higher. By contrast, rampant bearishness often heralds a market rise, because it suggests there are few people left to sell.)

Still, as good as stocks’ technical signs may appear, many technicians who are making big money in this market admit that it increasingly seems too good to be true.

“I really can’t believe it,” says Dan Sullivan, editor of the Chartist newsletter in Seal Beach. His technical models flashed a “buy” signal last May 5 and have remained bullish, despite wild market volatility. His recommended portfolio, which includes Compaq, Applied Materials and NationsBank, has gained 55% since May 5.

Time to sell? Not yet, Sullivan says. “The momentum still favors the bulls.”

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Tom Petruno can be reached at tom.petruno@latimes.com