Gurus Ponder the Obvious: Was That It for the Bear?

SAN FRANCISCO -- The most widely anticipated oversold bounce in recent market history arrived today with a splash.

Coming off the worst week since before World War II, the Dow Jones Industrial Average rose 4.5%, the S&P 500 gained 3.9%, and the Nasdaq Composite climbed 5.3%.

Predictably, and understandably, a big topic of discussion today was whether last week, and Friday in particular, represented the capitulation many observers say is necessary to complete the bear market cycle. (As discussed previously, there are many definitions of capitulation and it isn't an absolute necessity to end the bear. But it is something that's being closely watched.)

Several requirements previously cited for capitulation were met on Friday, notably the spike in the number of stocks at 52-week lows, according to John Roque, senior analyst at Arnhold & S. Bleichroeder and a RealMoney.com contributor. Additionally, volume was heavy last week and the 10-day moving average of the equity put/call ratio hit 0.98, the highest level since 1998.

But Roque, who correctly declared the midday bounce last Wednesday did not a sustainable reversal make, does not believe all necessary elements were evident last week to suggest the ever-elusive bottom is at hand.

"We'd be much more secure about writing [everyone was throwing in the towel] if the market had closed at or near its intraday lows," he wrote today, while also noting neither the CBOE Market Volatility Index nor the Arms Index produced a new high last week, despite all the alleged fear and loathing. The VIX reached an intraday high of 57.31 on Friday but fell shy of its peak of 60.63 in October 1998 and well below its intraday record of 172.79 in October 1987. Meanwhile, the one-day Arms Index did not even rise above 1.0 on Friday, much less approach its all-time high of 14.1 on Oct. 19, 1987.

Describing a bottom as "a process that involves stabilization" and retests, Roque reiterated a long-held recommendation: "Bounces should not be used to average into positions but as opportunities to reduce risk because we don't believe any developing rally/advance is going to be strong enough to assuage long-only investors."

Near and dear to GuruVision's heart is that the "unequivocal demystification" of Wall Street's prognosticators that Roque says must precede the bottom has occurred. Still, no major strategist has "thrown in the towel on their bullish forecasts," he observed.

The good news from a contrarian viewpoint is that previously defensive strategists such as Thomas McManus of Banc of America Securities, who added another 5% to his recommended equity allocation today, and Edward Yardeni of Deutsche Bank Alex Brown are getting more optimistic about stocks in the wake of last week's tumble.

Conversely, erstwhile permabull Jeffery Applegate of Lehman Brothers today cut his earning estimates for 2001 and 2002 and his rolling 12-month target for the S&P 500 to 1200 from 1375.

The bad news is the (still) most important bull of all, Abby Cohen of Goldman Sachs -- who last week "suspended" her year-end price targets and cut her 12-month S&P target to a range of 1250 to 1400 from 1550 -- today raised her recommended equity allocation to 75% from 70%.

Among Wall Street's other potential towel boys, Thomas Galvin of Credit Suisse First Boston lowered his 2001 S&P 500 earnings estimate to $45 from $51.50 but didn't alter his 2002 year-end price targets of 12,000 for the Dow, 1500 for the S&P and 2600 for the Comp.

Edward Kerschner of UBS Warburg last week cut his 2002 year-end target for the S&P to 1570 from 1835 but still sports a recommended allocation of 84% stocks, 14% bonds, and 2% cash; the most aggressive among so-called major strategists.

Then there's Don Hays of Hays Advisory Group in Nashville, Tenn.

Since his aggressively bullish call on Aug. 22, the Dow is down 16.3%, the S&P 13.9% and the Nasdaq by 19.4%, and that's after today's gains. Yet the veteran strategist has been unyielding in his belief a substantial rally is in the offing; a belief he repeated several times last week and again today.

Citing the recent spike in the VIX (which he previously described as a "good indicator" but "not a benchmark"), and other indicators such as the 15-day Arms Index, the equity put/call ratio and the McClellan Oscillator, Hays said a "historic buying opportunity" is at hand, on par with bottoms in 1987, 1992, and 1998.

"I believe that [the] bear market is over," Hays wrote today. "I certainly wish I had been able to call this catastrophe for you but I still believe that [if not for the events of Sept. 11] the decline would have already ended two weeks ago and the bull market would already be in place."

Whether he's considered a "major", "minor" or otherwise strategist, Hays cannot be considered a towel thrower.

Brass Tacks

Several readers have correctly noted that specific stock picking is more important than the endless groping for bottoms. Here then, is a rundown of the specific names being recommended by some of the "gurus":

Previous GuruVisions

Poised to Plunge, the Market Tiptoes Back From Capitulation

Still Bullish After All These Months

What Were They Thinking? Or Were They Thinking at All?

The Market May Be Getting Into an Upbeat Mood

Easy Money: Bullish Gurus Chant Fed, Fed, Fed!

Has This Market Built a Tolerance for Dr. Greenspan's Vaccine?

Joseph and the Amazing Semiconductor Dream Call

Mellow Market on the 'Cutting' Edge

The Market Still Hasn't Found What It's Looking For

Fed Action, Contrarian Indicators Signal Investor Opportunities

Optimistic Bears Belie Talk of Negativity

And the Winner Is...

Roque: "Investors will gravitate toward 'safe blue-chips' on any rally," including Citigroup (C Quote), IBM (IBM Quote), Tyco (TYC Quote), Microsoft (MSFT Quote), Intel (INTC Quote), and Johnson & Johnson (JNJ Quote). (Arnhold & S. Bleichroeder has done no underwriting for any of the above.)

McManus: Banc of America's "fresh money buy list" contains Johnson & Johnson, AmeriSource Bergen (ABC Quote), Avon (AVP Quote), Cardinal Health (CAH Quote), Eli Lilly (LLY Quote), Fannie Mae (FNM Quote), First Health Group (FHCC Quote), Freddie Mac (FRE Quote), Gillette (G Quote), and Pfizer (PFE Quote). (BoA has done no underwriting for the aforementioned.)

Kerschner: Stocks "relatively positioned for high uncertainty" include IBM, Freddie Mac, Pfizer, American Home Products (AHP Quote), AOL (AOL Quote), Cinergy (CIN Quote), Comcast (CMSCA Quote), Cox Communications (COX Quote), Energy East (EAS Quote), Fifth Third Bancorp (FITB Quote), General Mills (GIS Quote), Kimberly Clark (KMB Quote), Northern Trust (NT Quote), PepsiCo (PEP Quote), SAP (SAP Quote), TXU (TXU Quote), Walgreen (WAG Quote) and Wal-Mart (WMT Quote). (UBS has done underwriting for IBM, Freddie Mac, General Mills, PepsiCo, and TXU, and served as a financial adviser to Energy East.)

Applegate: Last Thursday, bought (for the firm's strategy portfolio, which was down 49% year to date through Sept. 19) AT&T Wireless (AWE Quote), SBC Communications (SBC Quote), HCA (HCA Quote), Merck (MRK Quote), and Kroger (KR Quote) (KR Quote). (Lehman has done no underwriting for the above.)

Finally, Douglas Cliggott, market strategist at J.P. Morgan, who believes fair value for the S&P 500 is now 900 based on the 10-year Treasury note's yield of 4.69% on Friday (it ticked up to 4.72% today), offered the following criteria for selecting stocks in the current environment: A beta, or measure of a stock's volatility, of less than 1.0; a dividend yield higher than the broader market's 1.6%; and a "modest, implied long-term earnings growth rate."