The Market Caught Its Breath; Now It's Time to Climb the Next Hill

We've had a brutal time of it this year. The Nasdaq , the go-go king of 1999 and early 2000, is ailing. Talk of recession looms heavy in the air, and the doom-and-gloomers have started barking "I told you so."

Yes. The Market Caught Its Breath; Now It's Time to Climb the Next Hill

No. The Only Thing Left of This Bull Is What Comes Out the Back End

But Tuesday's sharp gains have stirred at least a few bullish thoughts, even if we gave a little bit back on Wednesday. The question is: Are we at a long-awaited inflection point, a return to a bull market, or are we merely getting a short burst of optimism before we realize the Grinch is in full control of this holiday season?

These days there's no shortage of people making the bear case. So, rather than bore you with the familiar, let's try and craft the bull case without apology and see where it takes us. You see what sticks in my mind is that even after a 50% plunge in the Nasdaq, the pessimists think we're just getting started with the bad times. But you'd expect that from pessimists. They spent a long time in the dark, and now that they're out in the sun, they want to revel for as long as they can. My view is that perhaps we've just had the bad times, and the bears, as they often do, are settling down to feast just as the table gets cleared.

I've boiled the bull case into eight points. Here we go:

First and foremost is the Fed . Chairman Greenspan has gotten the comedown in stock prices he has lusted for ever since he began muttering about exuberance several years ago. The go-go Nasdaq-to-the-moon market flavor has withered. And signs of economic slowing are cropping up with greater frequency.

On Tuesday, Greenspan hinted that maybe it's time to change the tune at the Fed and start moving to a more accommodative stance. One of the major keys to the bull-market sprint of yesteryear was a friendly Fed. If Greenspan follows through and starts reducing interest rates (the low unemployment rate, still at 3.9%, is one thing that might stay his hand), then we have a return of the most important element of the bull case. It's an old saw, but it still seems to work: Don't fight the Fed. If the Fed is no longer in a fighting mood, there's cause for optimism.

Second, energy prices. Yes, the New Economy was supposed to end the reliance on energy prices. And, in a large way, it did. The tripling of oil prices from the lows in less than two years has not slaughtered the economy, but oil above $30 and near $40 did a great deal to slow things down. Now we're seeing oil prices start to ease, with futures contracts indicating prices into the $20s next year. If oil prices are starting to behave, that's another bullish arrow in the quiver.

Third, valuations. This is a trickier idea, but it returns us to one of the long-held beliefs of the Abby J. Cohen bull view. The Goldman Sachs strategist argues that the market moves in a step pattern, racing ahead and then holding as future earnings come into focus. We've been holding for a long time, waiting to take that next step higher. For some of us, holding has felt like falling, but the fact is stocks have not gained ground while corporate profits have continued to grow.

Consider that the Nasdaq is right around where it was in July, 1999, just before it began its remarkable sprint to 5000. That development -- increasing earnings on stock prices that, effectively, haven't moved -- has brought stock valuations back from the stratosphere.

Are stocks cheap? No, they are not yet cheap. But this bull market -- if we're talking about a return to some of the flavor of yesteryear -- rarely produced cheap moments. Even in 1994, during the last soft-landing pause, stocks never became historically cheap. But that pause, once completed, became a great buying chance for the next several years.

Fourth, competitive positioning. The fact remains that American companies -- U.S. stocks -- stand at the head of most of the key sectors that are driving growth in the world economy. High technology remains a powerful growth engine, and many parts of the world are still playing catch-up, angling to get into the 21st century. That's good news for the continued growth of the important high-technology stocks. And that's a good thing for U.S. stocks.

Fifth, cash. Lots of it is sitting on the sidelines. While the market has headed south, hard, since the spring, funds have accumulated cash positions. From 4.3% at the end of 1999, cash positions at funds have risen above 6%. Individuals have moved to the sidelines, building their own cash positions, and sentiment has become lousy.

Sure, some people are still hanging on, hoping and praying. But much of the selling, I would argue, has already been done. When sentiment gets this lousy, the contrarian view is that nobody is left out there to do a lot of selling. That's usually what happens when we find a bottom.

Sixth, politics. Yes, lots of concern about politics these days. But step back from the minute-by-minute courtroom drama and you still get what works for the stock market: a government that can mainly tweak around the edges. I hate the term gridlock, but the fact is that, in this environment, sweeping, intrusive moves by the government are unlikely, if not impossible. And the market, generally, favors incrementalism from Washington.

Seventh, inflation. Not nearly as benign as yesteryear, prices remain well contained with the Consumer Price Index above 3%. This takes us back to the Fed, and the Fed is the biggest key in this argument. With prices relatively quiescent, the Fed has room to maneuver, enabling it to execute the so-called soft landing -- slowing growth without driving us into recession.

Eighth, the economy. The key to the bull thesis is the continued expansion of the economy -- the successful soft landing of the economy. With the expansion so long in the tooth, it gets easier to fret about recession. But it's important to note that we've been here before. The Asian crisis in 1997 was supposed to spark a recession, but it didn't. The economy, racing a bit in 1999 and earlier this year, has returned to the same, steady path that Greenspan and his mates like. If the economy can shrug off the recessionary possibilities and continue to hum ahead, then the bull case gets even stronger. Earnings will continue to grow, and valuations will keep coming back to us. That is, until the bulls start to dive in, taking us on the next step upward.

What else can indicate that this eight-point bull thesis has merit? I like to turn to the Titans of high technology as market "tells." For a long time I favored Intel (INTC Quote) and Microsoft (MSFT Quote). On Tuesday these stocks shot higher, though Microsoft continues to have a tough time with litigation issues.

Cisco (CSCO Quote), struggling most of this year, put in sharp gains on Tuesday. That's another key tell. If the big dogs start rolling, we're getting an indication that the bulls are back in the game. We've had many false starts, and one day does not a trend make. But inflection points have a way of sneaking up and surprising even the sharpest chin-scratchers.

So, there's the bull case, adjusted and amended to fit our current world. Will it work? Let me know at [e-mail].