‘Stealth’ Bull May Be Emerging Amid Market Shift

Remember the “stealth” bear market of 1999? Even though key stock indexes such as the Dow industrials and the Nasdaq composite rose for the year, the majority of stocks declined.

Wall Street chart watchers were appalled. “Not good at all,” they mumbled repeatedly. “A narrowing bull market is a dying bull market.”

But what have we here: Last week, while the technology-dominated Nasdaq composite index struggled to hold its loss from its March peak to the 25% range, the 2,733-stock New York Stock Exchange composite index hit a record high.

The Dow industrial average, still heavily weighted with stocks that not long ago were mocked as Jurassic, rose last week to its highest level since April 25, gaining 2.4% for the week to finish at 11,027.80.

A few more weeks of that kind of action and we’ll be welcoming a new high in the Dow as well: The index now is a 6.3% move away from its record close of 11,722.98 set on Jan. 14.

Hmm. Has the stealth bear market given way to a stealth bull market?

In five of the last seven weeks, the ranks of advancing stocks on the NYSE have outnumbered declining issues. Even on Nasdaq, winners have topped losers in four of the last seven weeks, and were nearly even last week.

In other words, your odds of owning a winning stock seem to have improved markedly, especially compared with the market trend for much of 1999 and early 2000.

Another way to measure the market’s relative health is to look at the number of Standard & Poor’s 500-index industry groups rising versus the number falling.

During the last three months, 47 S&P; groups have risen in price while 40 have declined.

In the last month, 53 S&P; groups have gained while 34 have lost ground.

If you’re staring only at the Nasdaq composite index’s still-deep losses from the March peak--or say, at one of the index’s key component stocks, such as Dell Computer, which has plummeted 30% just since mid-July--it’s easy to come away from this market with the feeling that nobody’s making money.

Likewise, if you focus only on the year-to-date performance of major indexes, the market looks to be mired in muck. The Dow still is down 4.1% for the year. The NYSE composite index, though at historic highs last week, is up just 2.2% since Dec. 31.

Yet investors in such disparate stock sectors as home builders, brokerages, health maintenance organizations and tobacco have been racking up handsome gains since mid- to late May. And the rally--at least among blue-chip stocks--has broadened further in the last 30 days.

Clearly, part of what’s going on is classic “defense” by big money managers (including, perhaps, the person running your mutual fund).

On Wall Street, a defensive investment strategy can mean loading up on stocks that you believe are more likely to hold up well should the market overall stumble. Often, these either are relatively cheap stocks (as measured by price-to-earnings ratios) or stocks already beaten down.

In the current environment, defense also translates into rotation--that is, big investors (and many individuals) are moving some money out of the technology stocks that have led the market for the last two years, and into non-tech shares that had largely dropped off many peoples’ radar screen: food, energy and utility stocks, to name three.

“I think many managers are trying to protect themselves from any further technology weakness,” says Ned Riley, chief strategist at money manager State Street Global Advisors in Boston.

Should Nasdaq take another dive in fall, money managers want to make sure they’ve got potentially less vulnerable stocks in the mix to cushion their portfolios, Riley says.

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But there’s another driving force behind the broadening market advance of the last month: a growing sense that the Federal Reserve is indeed finished raising interest rates, after six increases over the last 13 months.

“I think the market does believe the Fed is done,” says Rao Chalasani, chief investment strategist at First Union Securities in Chicago.

The bond market, at least, seems to be buying that idea in spades: Last week, the yield on the 10-year U.S. Treasury note, perhaps the best benchmark now for long-term rates, fell to 5.77% by Thursday--its lowest level since last August.

It’s true that Treasury yields have been driven lower in part by the relative dearth of supply, as Uncle Sam continues to buy back existing debt.

But long-term interest rates have been sliding across the board in recent weeks. The yield on an index of 100 corporate junk bonds tracked by KDP Investment Advisors is at 11%, near the lowest since late March.

On Wall Street, some of the biggest gainers of recent weeks have been stocks of companies that typically fare better when interest rates are stable or falling: Home builders’ stocks, for example, are up 28%, on average, over the last month; stocks of property and casualty insurance firms are up 16%.

If this is indeed a stealth bull market, then, it’s following a time-honored script: Historically, when investors believe the Fed is finished with a credit-tightening cycle, they jump back into stocks--and in particular, into interest-rate-sensitive issues.

Could the market be guessing wrong about the Fed? We’ll find out soon. The next meeting of Fed policy makers is Aug. 22.

If the Fed again opts not to raise rates (it held steady at the last meeting, in late June, remember) the market will, as usual, be looking for more than that: Investors will feel much better if the central bank also makes some statement about its faith in the economy slowing to a manageable rate and about inflation remaining subdued.

Still, with the election looming, it may be easy for Wall Street to believe that no action by the Fed at the Aug. 22 meeting would mean no action by the Fed through November, or even year’s end.

If that provides a green light for the stock market, investors will have to decide whether the better shares to buy are the lagging but still richly valued tech issues, or the “old-economy” stocks that have revived in recent months.

Given that “momentum” investing still plays such a major role in this market, it isn’t too far-fetched to imagine that a new high on the Dow in coming weeks, while Nasdaq remains well below its March peak, would be all the old-economy sector would need to keep it in the lead of any new market advance.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com. For recent columns on the Web, go to https://www.latimes.com/petruno