No bedtime for bears as Nasdaq peak turns 3, awaits bulls

At below 1,300 on Monday, the Nasdaq Composite Index — the home of the biggest technology firms, including such Internet bubble survivors as Yahoo Inc—is much closer to the bottom than the top, if the October trough holds. In contrast, the broad Standard & Poor’s 500 lost 51 per cent to its five-year low of 768 on October 10, 2002, from its March 24, 2000, peak at 1,553. The blue-chip Dow Jones industrial average slid 39 per cent to 7,197 on October 10, 2002, from its peak at 11,750 on January 14, 200O.

Of course, bulls are still a dime a dozen on Wall Street, especially on the ‘sell’ side. After all, the average strategist tells clients to allocate most of their funds to stocks. But judging from their track record since 2000, the bulls have bet wrong on the ‘second-half’ recovery story as each of the eight or nine rallies so far have faded.

A group of die-hard bears is on the other side of the investment spectrum: They shun most stocks as pricey and argue that the excesses of the 1990s are yet to unwind despite the destruction of $8 trillion in investor wealth so far. ‘‘We have seen the highs for 2003 … and this bear won’t end till Dow 3,000-4,000,’’ a stock analyst Rick Berry said.

Although they were the Street’s laughing stock as the market surged in the 1990s, the bears have been correct in divining the market’s direction in the past three years. Now many look for a fourth straight down year, something that hasn’t happened since the stock market’s crash of 1929 became the market’s bust through 1932, early in the decade known as the Depression.

The bears say a sustained stock rally can happen in two ways: Buyers come in droves when stocks fall sharply or corporate profits rise to bring the S&P 500’S price-to-earnings ratio back to the historical norm. The price-to-earnings ratio can fall below 7 at bear market bottoms, while according to Thomson First Call, the P/E ratio is currently twice that—at 15.3, based on forward earnings.

Many pundits expect a rally as the bombs start flying in Baghdad, lifting the uncertainty that stock investors hate.

Analyst Ralph Acampora of Prudential Securities argues that stocks remain captive to the US-Iraq saga and the economy’s inability to stage a big recovery.

Chief strategist at CIBC World Markets Subodh Kumar pointed to a couple of pluses for the stock market: Cost-cutting by companies has stabilised operating margins and the Federal Reserve is keeping interest rates low, which cuts the cost of borrowing by companies and individuals. A normal environment, he said, could hoist Nasdaq to around 2,500 in the next 12 months to 18 months — up 93 per cent from Monday’s levels. He expects the Dow to rise as high as 10,500, and the S&P to 1,250 within the next 12 to 18 months. Nasdaq and the S&P 500 have broken below long-term indicators that flag a bull market, some argue. This means any rally would have to be massive before a new bull can take hold. (Reuters)