Is the Bull Market Over?

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Last week’s stock-market carnage — the Dow Jones Industrial Average fell 4.23% for the week to 13265.47 — seemed an overreaction to most analysts, who focus on fundamentals like corporate profits and interest rates. The global economy continues surging, they point out, while most market interest rates remain low by historical standards. What matters, they say, is whether the credit crunch, caused by ill-conceived loans to home buyers and businesses, starts to interfere with growth and interest rates, the Wall Street Journal reports.


But another, less fashionable, breed of analysts sees storm warnings. Known as technical analysts or chartists, because they plot and compare a wide range of sometimes-arcane market data on graph paper and spreadsheets, they liken their work to hurricane tracking. They can see a pattern building, they say; the trick is distinguishing a brutal Category 5 storm from a less-severe Category 2.


Like hurricanes, market tops tend to have a lot of common features, these analysts say. Whether a bear market features a crash, as in 1987, or is marked by a long, painful decline, as in 2000, the end of a bull market usually sends the same signals.


A top commonly looks like a roof, with indexes bumping up against it until they sag. Indexes hit a series of new highs, but over time fewer and fewer stocks join in. Big multinationals gradually take over leadership from the smaller, more-volatile stocks that typically lead a bull market’s early stages.


Sentiment turns from fear to greed as investors push stocks too far. Stocks top out one by one, often with a small band of highly admired issues leading the gains, until there isn’t enough strength left to hold the indexes up. This usually happens when interest rates are rising, pressuring businesses and consumers. Money managers, reluctant to sell for fear of missing out on more gains, get caught in the declines.


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