Bulls See Hope in Latest Stock Rally

After two winning weeks for the stock market, a growing chorus of bulls is being heard on Wall Street. But skeptics say it’s a song they’ve heard before.

The Dow Jones industrial average is up more than 1,000 points, or 14%, from the five-year low it hit Oct. 9, closing Friday at 8,322.40. Bolstered by robust earnings reports from several blue-chip companies last week, the Dow and the broader Standard & Poor’s 500 index scored their biggest weekly percentage gains in more than a year.

“For the first time in years, equities are more compelling than fixed income,” said Harvey Hirschhorn, head of asset allocation at Columbia Management in Boston. He recently shifted his recommended weighting toward stocks and away from bonds. He believes that the long slump in stock prices makes equities a good buy relative to Treasury securities, which had rallied as investors -- until recently -- fled to the safety of fixed income.

Thomas McManus, strategist at Banc of America Securities in New York, also recently recommended that investors shift money from bonds to stocks, saying his hunch is that stocks have seen their lows for 2002 and that key indexes could climb 10% to 20% in the next six months.

Yet even a solid fourth-quarter rally would not necessarily spell the end of the bear market. Stock prices have burst higher several times over the last 2 1/2 years, only to fall victim to steep sell-offs.

The Dow rallied 17.5% from July 24 through Aug. 22 before fading, for example. And after the Sept. 11 terrorist attacks, it surged 24.6% before fizzling and eventually plunging to new five-year lows. Even with its recent gains, the blue-chip barometer is down 17% year-to-date and 29% from its all-time high during 2000 -- and the S&P; 500 and Nasdaq composite indexes have tumbled harder.

“We are not looking a gift horse in the mouth,” strategist Kent Engelke of Andersen & Strudwick Inc. told Reuters after last week’s gains. “But we think the recent rally was excessive. Sharp rallies of this fashion are the hallmarks of bear markets.”

Economic data remain lukewarm overall, analysts note, and the potential for war with Iraq has rattled the nerves of pros and individual investors alike.

Moreover, after being burned several times during the bear market, investors are wary.

On the heels of four months of net outflows from stock mutual funds, an additional $9 billion has been withdrawn so far in October, including $4 billion in the week ended Wednesday, said Bob Adler, president of AMG Data Services in Arcata, Calif., which estimates fund cash flows.

“Investors have been chastened,” Adler said. “It’s surprising to me that the enthusiasm that has been there with every rally of the past 10 years simply isn’t there this time.”

That trend is evident in conversations with some Southern California investors.

“I’m scared of the stock market,” said Damon Freeman, 37, an unemployed aerospace engineer in Los Angeles. “We’ve had these short market rallies in the past: It jumps up, then it jumps right back down again.”

Arnold Bernstein, 62, an accountant in Century City, is equally leery: “All these rallies are points in the downward curve, because the market is still overvalued.”

Sara Hammes, 38, who works at a Los Angeles marketing firm, said she is “just trying to figure out how to get out of the stock market. It’s paying so little, I’d just rather take the losses and have my money in cash.”

The latest rally has sparked some hope, however.

Last week’s membership survey by the American Assn. of Individual Investors showed a rise in near-term bullishness. Bulls and bears were even at 39% each, with the rest neutral, just a week after bearishness had zoomed to a 10-year high of 55%.

Some strategists say the pessimism exemplified by recent fund flows and investor surveys could be seen as positive from a contrarian standpoint, indicating a climax in selling that might set the stage for buyers to wrest control.

“One of the things the bottom in July didn’t have is the pervasive pessimism that often accompanies the ultimate low,” said Liz Ann Sonders, portfolio manager at Campbell, Cowperthwait in New York. “This time we’ve seen that pessimism.”

The public is understandably “skeptical about the sustainability of the economic recovery and the validity of earnings,” Sonders added, nodding to the wave of corporate scandals in the last year. “But eventually that sustainability and validity will be proven.”

Strong earnings reports from IBM Corp. and Microsoft Corp. were encouraging, she said. IBM shares got an 11% lift Thursday after the company reported a jump in third-quarter sales, and Microsoft rose 5% Friday after the software giant raised profit forecasts for the year.

Of the 209 companies in the S&P; 500 that have reported earnings for the last quarter, 61% beat analysts’ estimates and the average year-over-year gain was 6.4%, according to Thomson First Call, the Boston-based earnings tracker.

Still, the recent brace of positive news hardly signals an all-clear in the eyes of investor Allan Spring, 45, a computer programmer in Irwindale.

“I’m feeling optimistic, but I’m trying not to get too committed to the idea,” Spring said. “Every time I say, ‘OK, it can’t get any lower,’ something else happens and down it goes.”