Through the end of last week, for every two stocks that were up this year, another three were down. Among the major companies in the

S&P 500

, 213 were up for the year and 287 had fallen.

These stats may seem unexceptional when you see that the S&P 500 is down 4.3% in 2004, but they're relevant because they helps us understand whether stocks today are merely in a soft patch of a bull market that started in spring 2003 or have actually resumed the great millennial bear market.

The latter is probably the case, unfortunately. But before holding a wake for stocks, let's back up a moment and see how we got into this mess.

Three weeks ago, I reported that the broad market's behavior through the end of the third week of July would probably provide a strong signal for its direction for the rest of the summer and fall. At the time, the S&P 500 and

Dow Jones Industrial Average

happened to be resting just below their 200-day moving averages, the usual dividing line between intermediate-term bull and bear markets. They were also sitting just above their 200-week moving averages, a dividing line between longer-term bull and bear markets. There was still a chance that low prices would generate enough buying enthusiasm among investors to push the indices back into bull territory.

Running Out of Ammo

When higher crude oil prices two weeks ago and lower national job-growth figures last week conspired to dent shareholders' faith in the potential for stronger second-half economic growth, however, investors unloaded a lot more stocks than they bought. And that selling shoved the indices well below both their 200-day and 200-week moving averages into bear territory.

Many big players in the market, such as long-only mutual funds, love to see a high-volume breakdown like that. They believe panicky selling gives them a chance to buy great stocks cheaply. But other big players, such as opportunistic hedge funds, are trend-followers, and they will see a major breakdown like the one that occurred last week as an opportunity to make money by pushing stocks even lower.

The winner in the battle behind reversal-players and trend-players is very often the one with the most ammunition. And at this point, you'd have to give the bears the edge as mutual fund inflows in the past two weeks have turned into outflows -- potentially depriving bulls of the ammo they need to send prices higher. Mutual funds are fully invested most of the time, so when the public starts pulling money out, their managers are forced to sell stocks to meet the redemption requests, even if they are personally bullish. This selling leads to more selling, and the rout is on.

Focusing on Fundamentals

Of course, all this talk of indices and averages can get pretty boring and even useless without an understanding of both the fundamental backdrop as well as the action of individual stocks. Let's take the first one first.

It's tempting to look at certain improving fundamental yardsticks and say that stocks are probably cheap enough to spur buying. After all, interest rates are still pretty low, and companies generally are getting more productivity out of fewer workers -- making them stronger financially. Economists at ISI Group estimate that the S&P 500 stocks on average are selling for 15 times next year's earnings, which is fairly reasonable. And corporate cash hoards are near record highs.

But all of these metrics are "coincidental" in the parlance of economists -- meaning that they tell you something about what's happening now, but not much about the future. To peer beyond the horizon, you need nonlinear measurements that bend around the corner and don't just extrapolate the present forward.

That's where the work of Lakshman Achuthan at the Economic Cycle Research Institute comes in handy. As I've reported all year, his weekly leading index -- which compacts a variety of predictive economic indicators into a single number -- has continued to point down in an increasingly persistent, profound and pervasive way despite rosy reports out of Washington. Achuthan's analysis suggests that U.S. economic growth is distinctly slowing from the above-average pace of last year.

Late last week, he reported that although all of his global coincident economic-activity indices remain in cyclical uptrends, all long-leading regional indexes have turned down. He said coincident indices are likely to follow suit and noted that there has historically been a 1-to-1 correspondence between growth-rate cycles and stock price cycles, especially in the U.S.

Here's the sequence: Normally the earliest indication of a coming downturn in the U.S. growth rate comes from a downturn in the long-leading index. Then there's a downturn in U.S. stock prices. And only after that does actual economic growth turn down. In the current cycle, the long-leading index peaked in July 2003, and stock prices followed early this year.

Looking for Bargains

So what about individual stocks? It's useful to look at the action of institutional favorites at times like this. If there really is a growing interest in buying bargains, there is a relatively short list of large and small chestnuts that the growth crowd always likes to buy on big dips:

  • Coffee retailer Starbucks (SBUX) - Get Report, which survived the 2000-02 bear market with barely a scratch. Sellers pushed it down to its 50-day moving average, but it shows signs of stabilizing there. Score one, for now, for bulls.
  • Orthopedic-devices maker Stryker (SYK) - Get Report, which has not been so fortunate -- trading down below its 200-day average and not finding much support.
  • Transportation logistics specialist Expeditors International (EXPD) - Get Report, which has also traded down to its 50-day average and is not getting much love.
  • Security-software maker Symantec (SYMC) - Get Report, which is in a rather serious downtrend.
  • Gum maker Wrigley( WWY), which has also entered a downtrend.

If the bulls can't get these going, there is less hope for stocks that have not rewarded them as much in the past, and which are thus second and third choices. Meanwhile, it is instructive to observe the sort of stocks that are finding favor -- mostly dividend-paying utilities:

  • Ameren (AEE) - Get Report, an electricity generator in Illinois and Missouri, is rising and getting ready to challenge its historic highs.

  • PPL Corp. (PPL) - Get Report, a Pennsylvania electricity generator challenging historic highs.

  • Edison International (EIX) - Get Report, a California electricity generator on a tear of new highs.

  • Exelon (EXC) - Get Report, an electricity generator in Illinois on a tear of new historic highs.

It's pretty hard to have a bull market when growth stocks, which people buy when they're optimistic about the future, are losing ground and defensive stocks, which people buy when they're pessimistic, are taking their place. So with the fundamental picture clouding up and the technical picture already stormy, it's hard to be sanguine about the prospect for a rebound.

10 Stocks to Scrutinize

If you insist on buying stocks anyway, perhaps because you are unusually optimistic about the prospects for a Bush or Kerry presidency, or think that the Fed will pull a rabbit out of its hat, or just believe that the rest of the world has overdosed on fear, here are 10 stocks to consider, at least, since they're still hitting new highs and are highly rated in the MSN StockScouter system.

Jon D. Markman is publisher of

StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. At the time of publication, Markman had positions in Starbucks, Symantec, Stryker, Expeditors International, Edison International and PPL. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at

jon.markman@gmail.com; please write COMMENT in the subject line.