Bull or Bear?

03/24/2006 12:00 am EST

Focus:

Harry Dent

Author, The Demographic Cliff

By analyzing long-term cycles, Harry Dent sees a strong rally ahead. Also using long-term cycles, Steve Hochberg foresees a major market decline. Here, we offer their bullish and bearish views to help you decide if the glass if half empty of half full.

"It is likely that the markets will pull back briefly and then head up more sharply from April into around August," says Harry Dent in his H.S. Dent Forecast. "The typical pattern in the second year of the four-year presidential cycle is for a rally in January, sideways movements in February and March, a stronger rally from April into August, and then a sharper correction into October. The second year is the weakest, with only minor gains. However, in the second term of a president, the gains tend to be much stronger, near 20% on average.

"The Fed keeps looking like it will raise interest rates one to two more times. However, we still think that the economy is set to slow, which will change the Fed’s plans, with only one more rate hike likely and maybe not that. The slowing in housing should be a strong plus for stocks, as money continues to shift from housing speculation back into stocks, especially large-cap growth and technology stocks. The only obstacle to the markets continues to be high oil and commodity prices. We continue to expect these trends to back off soon and help to stimulate the surge ahead in stocks.

"We expect a much stronger rally than is typical of the second year, as we are coming out of a very bullish long-term trading range pattern from 2004 through 2005 and the Fed is due to end a long tightening cycle soon. If we don’t see the markets start to accelerate by April, we will scale back our forecasts. For now, we still see more upside than downside this year, even if the markets are less bubbly than our very contrarian forecasts. Investors should continue to be fully positioned for a likely strong surge just ahead and be buying further on any short-term setbacks in March. The small-cap and tech stocks should lead the next rally, with large-cap growth finally coming on much stronger."

"The Elliott wave pattern and supporting technical evidence are clear and compelling the bear market rally is ending," says Steve Hochberg in The Elliott Wave Financial Forecast. "This strong potential is compounded by the four-year cycle, which is entering its hard down phase and scheduled to bottom late this year or early next. The downward cyclical pressure on stocks should be intense in coming months. The majority of stocks in the Dow have already entered the next leg down and the index itself should now play catch up. The absence of participation in many of the most important blue-chip stocks dramatically signals the weakening strength of the uptrend. Any further rise should be weak and brief.

"The all-time peak in 2000 was unprecedented in terms of extreme stock market psychology. The final upward twists of the current countertrend advance may not be generating an exact replica of that period, but it’s pretty darn close. Equity funds received $31.8 billion of net inflows in January, the sixth largest monthly total in history. The only bigger months were the first four of 2000 and January 2004, when the bear market rally was a few days from a peak. This surge represents a major capitulation to the uptrend. Discount brokerage firms are seeing record levels of activity and at Fidelity, net flows into stock funds surged $5.6 billion versus just $400 million in January 2005.

"Two more features of the 2000 all-time highIPOs and corporate buyouts are hotter than at any time since. In some areas, the latest stock market euphoria is even more vivid. After 213 years as a partnership of members, the NYSE is becoming a publicly traded entity. More than a century of seat-price records tell the story: exchange ownership is valued most highly at major tops. In 1999, the exchange made its first move toward a public offering, just prior to the bear market swoon. The success of the latest effort to get the exchange into the hands of the public undoubtedly heralds an even more dramatic reversal. The upcoming volatility explosion will make stock trading go out of style for a long, long time."

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