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Bull market or just a rally?


The market's recent strength is causing some growls in the bear cave, and for good reason: The rally seems unstoppable.

Gurus who were neutral or negative just a few weeks ago, such as Martin Zweig of Zweig Forecast, now marvel at how the technical indicators -- such as charts and moving averages -- are at their most-bullish levels in years. The market rise is causing carnage among some short-sellers, especially the amateurs who don't have the financial staying power (or the stomach) to remain bearish.

In the past few days, "There's been a small but growing fear among money managers that they may have missed the best part of the rally," says technical analyst Christine Callies of Cowen & Co. in Boston. "Some are trying to make up for lost time by opening positions in high-relative-strength stocks" -- stocks that have been moving up faster than the market, such as Menlo Park, Calif.-based Cisco Systems -- a technology company -- which has gained 45 percent in the past month. "They think the market is bulletproof." But she says that evidence to support belief in a new bull market "is sparse," and that prospects for the economy and earnings are "inconclusive."

"Either the market is telling us all the negatives we know are discounted, and something better is coming later, or it is going to go up long enough to lull us into thinking things are better just as they start to deteriorate again," says Robert Farrell, Merrill Lynch's highly regarded, but currently baffled, chief strategist.

Farrell is betting on the latter scenario, and labels himself a long-term bear. Like a number of other analysts and money managers, he is still concerned about the economy.

The real question for 1991 is whether fundamentals will be improving enough when the technical strength dissipates to carry the trend further," he says. Some brokers I know think the rally could end today, but Farrell says the upswing could last several more days or weeks, or several months, with the Dow reaching 2,750 to 2,800 this quarter. Later, he says, it could be stampeded as high as 2,950.

Interestingly, Farrell points out, the current situation is the inverse of precrash 1987, when the technical indicators were weak but earnings and the economy were strong.

DOGFIGHT: The McDonnell Douglas saga, which is becoming a regular fixture of this column, continues. Defense-industry analyst Andrew Brichant of Ladenburg, Thalmann & Co. in New York, who was the only Wall Street analyst to predict publicly that the Pentagon would cancel its contract with McDonnell Douglas and General Dynamics for the A-12 attack plane, has fired another salvo. This time, in a memo to his company's sales force, he declares that McDonnell Douglas "will have to seek the courts' protection under Chapter 11 of the Federal Bankruptcy Act if it is to survive as an ongoing operating company," and that this will happen sooner rather than later -- within 30 to 60 days. He cites the company's high level of debt, its negative cash flow -- he forecasts that it could top $1 billion this year -- and his doubt that banks will give the company new credit. A company spokesman didn't return my call.

SWITCH-HITTER: Prudential-Bache banking analyst George Salem is the bear of bears among banking analysts. But late Tuesday he upgraded his rating on the industry to a "hold" from a "sell" near-term. While he remains a long-term bear on banks, for the short term he cites certain positive expectationsfor example, that continued monetary-policy easing by the Federal Reserve will result in lower interest rates, that federal regulators will relax their tough loan exams and accounting rules and soften their generally hard-nosed attitudes, and the perception by investors that there will be large mergers, which could boost bank-stock prices.

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