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Brad Mills, a retired Merrill Lynch broker who currently works as an independent trader, is experiencing a bad case of the market uncertainty blues.

Last year, when he set off on his own, he put $1 million in aggressive growth stocks. But now, the technology euphoria that helped Mills double his money has forced him to rethink his bullish strategy and move some of his money into safer investments such as municipal bonds and value plays.

"There are dislocations in the system," said Mills, 33, from his home in Scottsdale, Ariz. "There's such a mania, it has to decline. Will it affect our economy like it did in 1929 or 1987? I'm 50-50 on what ends up happening."

Like Mills, many investors, analysts and fund managers are beginning to worry that the "new economy," characterized by highflying tech stocks trading at huge multiples to earnings -- when there are earnings at all -- may be cracking as an underlying bearish trend rears its ugly head.

Several indicators support the argument. For one, the number of companies on the

New York Stock Exchange

that have fallen to new lows has sharply and consistently outpaced the number of companies reaching new highs. Market watchers, who follow the relationship between these winners and losers in order to track underlying market trends, say they are particularly worried about the current disparity because several of the companies that are falling to record lows have demonstrated solid financial performance.

Pain on the Big Board
NYSE new highs minus new lows

Source: Baseline

"If you look at the

S&P 500

and exclude tech stocks, since last July, it is down 18%. Earnings were up 10% in that same category," says Stan Shipley, an economist with Merrill Lynch. "The bear market does not appear to be completely justified in our minds."

Indeed, among the companies that have recently reached new lows are







Johnson & Johnson


, all of which reported good earnings growth in fourth-quarter 1999.

According to a recent study published by

Salomon Smith Barney

, some 70% of the companies in the S&P 500 now qualify for bear-market status, their value having declined more than 20% since 1998, when the market had the greatest breadth.

Tech Drives the Bus -- But Is it Broken-Down?

The current market disparity centers around the success of the tech sector, which has broken all the traditional rules, showing that companies do not need strong fundamentals to win investor confidence.

As a result of the huge tech surge, investors are convinced that they


to be in tech stocks in order to make big profits. The self-fulfilling prophecy has resulted in more money chasing fewer stocks.

"We have never owned so few groups while maintaining a position of close to 50% S&P market weight," Alan Shaw, an analyst with Salomon Smith Barney, wrote in a recent report. "We must admit, we actually just added to our model's technology position as a result of recent group shifts."

Even those concerned over the rush into the tech sector admit it's difficult to find alternatives.

"There is so much weakness in the


that people are selling those types of issues to buy stocks in the tech sector," says Bruce Bittles, market strategist at

J.C. Bradford

in Nashville. "Everyone has become a price momentum buyer. The fundamentals are being brushed aside and no one is paying attention."

Bittles said what bothers him more than the lofty valuations in the


is that the crowd psychology is "reaching an extreme where everyone is placing the same bets in the same areas."

Mark McNabb, of Blacksburg, Va., who has been buying and selling stocks for two decades, readily admitted to altering his patterns to go with the gains.

McNabb, a professor of finance at

Virginia Tech University

, said his investments are mostly in cash and high tech. "I've gone through all the old sectors I used to invest in. I can't find a reason to own them. It's hard with rising interest rates and market sentiment. I can't buy retail anymore and banking is tough," he said.

Robert Benson, chief investment officer of

Amica Mutual Insurance

warned, however, that the bubble is likely to burst. "Everyone just has this idea that tech will go up forever and demand will be there forever, but a basic economic slowdown could turn down the tech cycle."

Some analysts said a significant hike in interest rates, which

Federal Reserve


Alan Greenspan

has promised, could put the brakes on the market's recent rally, which saw the Nasdaq climb 86% in 1999 and the Dow, 22%.

Benson noted that the herd mentality also existed back in the early 1970s when investors poured into a group of growth stocks that became known as the "Nifty 50." After their valuations reached unsustainably stratospheric levels in 1973, the house of cards fell, triggering a 45% drop in the S&P index.

But not all market watchers buy this gloom-and-doom scenario.

Some, such as Boyan Jovanovic, a professor of economics at

New York University

, said the new economy also defies behaving in accord with traditional trends when it comes to the downturns. "Times have changed. The Nasdaq is highly valued because people think the earnings will come in the future. They are not only after earnings right now."

And Brian Belski, chief investment strategist at

George K. Baum

, said the damage to the Dow and other cyclicals is overdone and will eventually reverse course. Referring to Merck, Johnson & Johnson and



, Belski said people are "acting and trading these companies like they are going out of business. These are the ones that led the initial breakout since 1994."

The fact that some of these former market darlings have been cast aside despite solid fundamentals is a phenomenon that should provide excellent longer-term opportunities, according to Belski. "Yes, we continue to advocate over-weighting technology. But, prudent buyers should consider bottom-fishing."