Some Bearish and Bullish Gurus Do a Switcheroo

GuruVision: Slowly They Turned

SAN FRANCISCO -- Steve or Billy? Juliette or Jennifer? While the post-Oscar kibitzing over who's the funniest or the sexiest continues, so, too, does the raging debate on Wall Street over whether last week marked any sort of meaningful trend change.

Meanwhile, the Dow Jones Industrial Average rose 1.9% today and the S&P 500 gained 1.1% but the Nasdaq Composite slid 0.5%.

Previous GuruVisions

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Optimistic Bears Belie Talk of Negativity

C'mon Greenspan, Do the Locomotion...

To Heck With Tech! Some Key Gurus Staying Away Short Term

Turning on Tech: Some Gurus Cast a Bearish Glance at Tech Stocks

Perfect Timing? Yes, You Can Time This Market, Says Guru

Market Bullheadedly Ignores Missed Earnings, Salivates for Rate Cut

This Rosencrans Has Thorns: Market Blooms, but Strategist Offers Warning

And the Winner Is...

Despite the major averages' mixed message, those espousing a bullish view were encouraged by the solidly positive market internals (albeit on soft volume). Also, untenable as it might be to some, optimists were encouraged that big-cap tech lagged, with the Nasdaq 100 down 1.7%. If a new bull phase is really under way, it is highly unlikely that prior leadership -- large-cap growth stocks -- will be at the vanguard. Thus, it's a healthy sign for groups such as retailers, transports, and various other cyclicals to set the pace, as was the case today, when the Morgan Stanley Cyclical Index rose 2.1%.

Of course, one session (or two or three) doth not a market make, and it's safe to say nothing that transpired today is going to change the outlook of those who believe we're experiencing, at best, another bear market rally destined to burn most participants.

Nevertheless, it's interesting to note a subtle, but significant, change in the latest filings of several gurus we follow. Specifically, some who've long been bearish are less so, a growing list that already includes Thomas McManus, Don Hays, Doug Kass and Steve Leuthold. Meanwhile, some previously unflinching bulls are expressing less confidence.

Both trends support the rally scenario, at least for the short term and at least on an anecdotal basis.

Most prominent in the former group is Richard Bernstein, chief quantitative strategist at Merrill Lynch.

As I reported in RealMoney.com's Columnist Conversation earlier today, Bernstein -- who has long recommended a defensive approach to the market -- issued a report this morning titled "The First Light at the End of the Tunnel?"

"Although the vast majority of our profits indicators remain quite pessimistic," two are looking more optimistic, he wrote. The first is the slope of the yield curve, which is rapidly approaching a more normalized slope, usually a precursor to economic growth/rebound. This is happening despite ongoing prophecies of economic doom and complaints Federal Reserve policies remain overly restrictive.

Second, the trend in earning estimates in Asia is improving, particularly in Korea, where recent data suggest revisions may be bottoming, Bernstein observed. "The performance and estimate revisions of Korean stocks tend to lead the U.S. and global profits cycles because these companies are among the most levered in the world, and are extremely sensitive to changes in global profitability."

Regarding the global economic picture, a couple of other positives include reports of large write-offs by big Japanese banks and rising hopes the European Central Bank will get with the rate-cutting program when it meets Thursday.

Still, please note that Bernstein's overriding message is that it's too early to get bullish and his recommended sector allocation remains unchanged; as of a week ago, it favored defensive and counter cyclical themes, including consumer staples, health care, energy, utilities, engineering/construction, aerospace/defense, high-quality financials and small-caps. "Nonetheless, these indicators are potentially encouraging news," Bernstein wrote today.

On the flip side, a few strategists who've largely been beating their heads against the brick wall of bullishness in recent months -- if not longer -- are now at least conceding the pain.

Jeffrey Applegate, chief investment strategist at Lehman Brothers, acknowledged his year-end price target of 1600 for the S&P is "silly," and thus lowered it to 1400. "Regrettably, we have been bullish and wrong" for the past year (plus), he added.

Still, Applegate predicted "the stock market will end up having a good 2001," as evinced by his new, lowered price target for the S&P 500, which is 21.4% above today's close. "Anticipating a market bottom," the strategist recently reduced exposure to health care, utility and energy stocks while buying D.R. Horton DHI and KLA-Tencor KLAC. (Lehman Brothers has not done recent underwriting for either.)

Similarly, Robert Robbins, chief investment strategist at Robinson-Humphrey in Atlanta, wrote that "no bottom seems confidently in place currently," and that "the risk of a further decline in of the nontech S&P 500 has increased."

However, Robbins' overall outlook remains rosy: "Our continuing view is for the stock market to rise unusually strongly by year-end," he wrote.

Elsewhere, Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis, wrote: "We still believe the market has some fundamental overhead issues to deal with over the next few weeks that will likely prohibit an extensive move to the upside."

I was struck by that "still believe" comment because my recollection was that Belski has mainly remained optimistic throughout the downturn and stuck by technology's big guns despite the shelling they've endured.

In a follow-up call today, Belski reminded me that he'd turned cautious in mid-February. True, the contrarian picks he made then have fared relatively well, save JDS Uniphase JDSU.

In early March, he turned bullish on names such as Aloca AA, Dupont DD and Target TGT, and today suggested the market is "entering into a classic early cycle recovery." Cyclical issues have similar characteristics to energy and utility stocks of a year ago, he said; namely, favorable earning trends.

Still, while cautious on tech short term, he remains bullish on the group long term, particularly semiconductor and PC hardware names that have been trading at lower valuations for some time "rather than stocks hit more recently," such as software and fiber optics. Recommendations include Dell DELL, Applied Materials AMAT, Micron MU, Gateway GTW, Compaq CPQ and Novellus Systems NVLS. (U.S. Bancorp Piper Jaffray has done no underwriting for the aforementioned.)

As mentioned above, the shifts were subtle, although I do think significant. Still, it would be disingenuous to not note that several gurus have stuck by their recent views. Doug Cliggott of J.P. Morgan, Bernie Schaeffer of Schaeffer's Investment Research, Kent Engelke of Anderson & Strudwick, and Jim Rohrbach of Investment Models each reiterated their defensiveness/bearishness/caution in their latest filings. Conversely, Thomas Galvin of Credit Suisse First Boston continued to push the bull (case).

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