Just Ahead: Dow 40,000?

As the market heaves and groans with dyspepsia this week, it's hard to imagine the super-bulls could be right. But maybe we should be open-minded for a moment and note that one expert's guess may be as good as another these days. While it's always tempting to side with the downers who moan about the negative effects of another Fortune 500 bankruptcy, higher interest rates, energy prices and inflation, we might just as well consider what might happen if the rebuilding of New Orleans, Biloxi and Islamabad let the good times roll again.

The two leading trumpet-blowers in the optimist brigade are Don Hays, a veteran Wall Street strategist who runs Hays Advisory, and Harry Dent, an economist-author who runs the HS Dent Forecast. Both believe the past 20 months of flat returns in the broad market indices have just about done their job of lulling investors to sleep in advance of a gigantic rush to much, much higher ground.

In late September, Hays told clients to expect gains of 100%-plus in the next couple of years, in part due to vast piles of individual and corporate cash being put to work amid "the reinvigoration" of the U.S. dollar and productivity. "The monetary liquidity floating around the world is so humongous, it is impossible to describe all the pockets overflowing and looking for a home," he said, adding that he believes U.S. GDP is on track to double to a 7% annualized rate, while inflation will remain in a 1%-to-2% range over the next decade.

Not to be outdone, Dent told clients on Oct. 1 that he "couldn't be more bullish for the next year and the next five years." He added: "Ignore the news and be investing as fully as your risk tolerance warrants. ... We are very close to the last great buy opportunity ahead of the greatest five-year stock bubble in history. And still, no one suspects such a bullish scenario while our long-term indicators say it is almost inevitable."

A Pattern Emerges, Again

A key element of both the Dent and Hays outlook is the observation that most extreme bull phases of the last century -- 1915 to 1919, 1925 to 1929, 1935 to 1937, 1985 to 1987 and 1995 to 1999 -- were preceded by major corrections (or crashes), followed by a strong initial recovery and then a one-to-two-year trading range.

Of course, the implication is that the crash in this case was the 2000-02 bear market and that the recovery rally happened in 2003 and the trading range was seen from 2004 to 2005. Dent suggests that the markets "are simply waiting for signs that the Fed can't tighten much further" and for oil to correct below $58-to-$62 support levels "to suggest a top in that bubble."