SAN FRANCISCO -- A few cracks appeared in the "new bull market" thesis this week, but there was a bit of fresh plaster around to minimize the damage.




debacle was certainly the week's most high profile "crack," while others included:

  • The declaration that the economy has "officially" been in a recession since March, news punctuated by Friday's downward revision of third-quarter gross domestic product to a decline of 1.1% from an initially reported drop of 0.4%;
  • A sharp decline in the Conference Board's consumer confidence index;
  • A big downward revision to monthly industrial production/capacity utilization for October;
  • A rise in new jobless claims after four-straight weekly declines;
  • A sharper-than-expected fall in the Chicago Purchasing Managers Index of manufacturing activity.

Of course, there were some positives, including a much better-than-expected durable goods report, continued strength in new home sales and more advances on the war front. But concerns about Enron's far-reaching impact and worries that the economic recovery might not be arriving as quickly as many expected dominated. (One trader ruefully compared Enron's failure to declare bankruptcy with the Taliban's refusal to surrender.) Therefore, the ability of major averages to avoid big losses was impressive. For the week, the

Dow Jones Industrial Average

fell 1.1%, the

S&P 500

shed 1% and the

Nasdaq Composite

climbed 1.4%.

For the month of November, the Dow rose 8.6%, the S&P 500 gained 7.5% and the Comp jumped 14.2%.

The pattern of major averages holding up well in the face of negative news reappeared Friday as the aforementioned GDP revision and some cautious comments from



failed to dent stock proxies.

Nevertheless, even some of the market's most stubbornly bullish observers concede that "the easy money on the

post-Sept. 11 rebound effect has been made," as Don Hays of Hays Advisory Group in Nashville, Tenn., commented.

Midweek, Hays sold the

Nasdaq 100 Trust

(QQQ) - Get Report

stake he bought during the "flurry of panic" that occurred when trading resumed following the Sept. 11 terrorist attacks.

"I am not a short-term trader, but these type of conditions are just too easy to pass up

and the 'bounce back,' especially for Nasdaq stocks has pretty much neutralized the oversold condition," he wrote Wednesday. "Even though a correction is certainly not a sure thing, it is a distinct

and growing possibility."

Apparently, many investors shared the same view: Equity mutual funds suffered outflows of $2.2 billion for the week ended Nov. 28, while money market funds took in a whopping $16.8 billion, AMG Data reported.

That said, Hays was adamant in his belief that the "baby bull market is still very much alive and well." Long-term investors may wish to "prune" their portfolios for tax reasons, but "don't overreact," he recommended. "Now is a time to be bullish with the major portion of your 'risk capital' in stocks."

Of course, Hays has been bullish for much of the year, a position that has only recently proved rewarding.

Conversely, Thomas McManus, equity portfolio strategist at Banc of America Securities, has mainly preached caution this year, save for a few brief

bouts of optimism. At 60%, McManus' current recommended equity allocation is among the lowest of the so-called "major" strategists.

McManus theorized the equity market held up pretty well this week largely because many investors may have chosen not to sell stocks with losing positions because of the wash-sale rule. The rule prohibits individuals from taking capital losses for tax purposes if they purchase the same security within 30 days of the sale.

Many investors chose not to sell losing stocks for fear the market would continue rallying and the wash-sale rule would dissuade them from repurchasing their favorite names until next year, McManus said. Additionally, the practice of some investors "acquiring additional stakes in their favorite longer-term holdings with an eye toward recognizing a loss on shares purchased at higher prices" ended this week, he commented. "Tax-loss selling will almost certainly be a hallmark of trading during December."

Moving the Averages

Of course, there are myriad reasons offered as to why the rally will run out of steam. In addition to tax-loss selling, there's still a lot of concern about firms'

exposure to Enron. Moreover, many hard-core bears contend that the Enron situation "is the tip of the iceberg when it comes to the U.S. economy's exposure to derivative risk," as Dave Hunter, chief market strategist at Kelly & Christensen, declared via email.

Hunter, among others, noted that energy derivatives pale in dollar volume to interest rate and currency swaps. If things turn out as the strategist predicts -- rising rates in conjunction with a sharply contracting economy -- "we may be entering a period in the next six months where a similar misjudgment

with derivatives could lead to one or several major financial institutions suffering a fate not unlike that of Enron," he wrote. "This is not a time for bullish complacency."

Whether it represents complacency or not, there was a lot of bullish chatter at week's end about the major averages approaching their respective 200-day moving averages. Although skeptics note the 200-day averages are still downward-sloping, the 50-day averages have turned upward, which is a positive technical development.

Additionally, Yale Hirsch, editor of the

Stock Traders Almanac

, notes December has been the best month for the S&P 500 since 1950 and the second-best for the Dow Industrials, with average gains of 1.8% apiece. December also has been the second-best month for the Nasdaq since its inception in 1971, with an average gain of 2.5%, Hirsch reported in the recently released 2002 edition of the almanac.

In sum, there's still reason for short-term optimism, but long-term concerns remain.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.