What a Week: Friday Stampede Salvages Indices

SAN FRANCISCO -- Bull market heroes Alan Greenspan and Abby Cohen took some lumps this week, but the bull market mentality lives on. Or so it appeared Friday when signs of stability at Cisco (CSCO Quote) helped spur a sharp tech-led rally. Friday's gains helped major averages erase losses suffered earlier in the week, leaving the Dow Jones Industrial Average up 1.7% for the week, the S&P 500 higher by 1.8% and the Nasdaq Composite up 2.3%.

Although Cisco basically said orders in the first few weeks of the quarter are "in line" with its previous guidance, the announcement had far-reaching implications. In addition to sending Cisco shares up 8.1%, the news caused investors to become optimistic again on other networking stocks such as Sycamore Networks (SCMR Quote), which rose 15.3%, as well as communication chipmakers such as Applied Micro Circuits (AMCC Quote), which gained 11%, and Vitesse Semiconductor (VTSS Quote), up 10%.

Those gains -- along with a 4.8% rise at Microsoft (MSFT Quote) after its appeals case was sent back to a lower court -- helped the Nasdaq 100 rise 5.5% Friday. Elsewhere, the Philadelphia Stock Exchange Semiconductor Index climbed 6.2%.

Suddenly, everything seemed "right" in techland once again -- even Lucent (LU Quote) rose 5% after the beleaguered telecommunications equipment giant said it expects to return to profitability next year.

The action Friday was anomalous because of the extent of the gains but actually completed the week's on-again, off-again trend.

Stock rose Monday but stumbled badly Tuesday after the Federal Reserve lowered interest rates by 25 basis points. The action was as expected, but dashed hopes for a bigger cut. Furthermore, the Fed issued a statement that focused on the negatives, which wasn't expected (or appreciated) by investors. Stocks rebounded Wednesday but retreated again Thursday after the minutes of the FOMC's June meeting dealt another blow to Chairman Greenspan's credibility.

The market's mood seemed darkest Wednesday morning, when Don Hays of Hays Advisory Group issued an unfettered bullish outlook.

Hays' call generated a lot of emails, many of them dismissive. Many readers simply couldn't fathom a substantial rally from here, noting dismal conditions for corporate earnings and still historically high valuations. Such attitudes play into Hays' belief that sentiment -- a contrarian indicator -- is dreary (at best).

But other critics noted that Hays is far from alone in pushing the bullish case right now. Indeed, while Goldman Sachs' Cohen cut her earnings estimates and price targets this week, and other "permabull" strategists are keeping lower profiles, it's not terribly difficult to find optimistic forecasters. Most notably, UBS Warburg has taken full-page ads in major newspapers declaring that its strategist Edward Kerschner believes the S&P 500 should be 50% higher by year-end 2002. At TheStreet.com/RealMoney.com, Kirlin Securities' Tony Dwyer issued a bullish outlook Thursday.

To skeptics, such developments suggest that Wall Street has nowhere near capitulated. Moreover, they believe Friday's action indicates that investors have learned very little in the past 18 months as they again flocked to erstwhile highfliers in tech.

The "drumbeat of hype" from Wall Street and the financial press regarding the news from Cisco has "the crowd trying to push the market up but, they will fail," said John Mesrobian, the ever- (or is it uber?) bearish analyst at Constantinople Advisors in Williamsburg, Va.

Mesrobian reiterated previous predictions that major averages will soon "blow past" previous lows in conjunction with a rapidly falling -- rather than slowing correcting -- dollar.

The dollar slid midweek after the Fed ease, an improvement of business sentiment in Germany, and the White House's report on the shrinking budget surplus. But the greenback recovered later in the week -- aided by Friday's strong housing sales data -- and closed up on a weekly basis vs. the euro for the first time since early July.

The Anti-Bulls

As with the optimists, it's not terribly difficult to find market watchers with draconian views.

Save for a (very) brief flirtation with optimism in early March, Alan Newman, editor of H.D. Brous' Crosscurrents, has long been one of the market's most steadfast skeptics.

On Tuesday, Newman reiterated downside targets of 8800-9200 for the Dow, 980-1020 for the S&P 500 and 1465-1560 for the Comp. The odds are "at least" two in three that those ranges will be hit by year-end, he wrote in the latest issue of the newsletter.

In addition to a belief that most Nasdaq stocks remain "grossly overvalued," Newman cited several factors that compel him to dismiss the notion that a new bull market is beginning (or already under way). These included the fact that dollar trading volume (DTV) of stocks as a percentage of GDP remains well beyond historic norms.

While down from its peak of 322% last year, DTV was at about 258% in July and August, he estimated. This means that for every dollar spent on the purchase of goods or services in the so-called real economy, $2.58 is spent in the trading of stocks.

Data of this nature (and the action Friday) suggests "the mania" has not ended, Newman wrote. That "can only come when all participants finally realize that the good times are not going to return and the need for capital preservation takes over, triggered by visible and palpable fear."

As is often the case, the ultimate outcome is likely to be somewhere between the extreme bullish or bearish view. But after Friday's bout of optimism, the onus is back on the bulls to demonstrate that the latest advance is not just another false dawn.