Commentary > Bid and Ask
A brand new bull
Stocks are up better than 20 percent from their lows. Is the market having a cow?
May 13, 2003: 8:32 AM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - You ever hear that old rule of thumb that says when stocks are up better than 20 percent from their lows, it's a sign of a bull market? We're there.

The S&P 500 is now up 21.8 percent from its October closing low and the tech-stuffed Nasdaq is up 38.3 percent. Of the major indexes only the Dow is shy of the 20 percent market -- it's up 19.8 percent.

Now, Wall Streeters all seem to hate the 20 percent rule. They say it's a made-up idea, probably by some reporter (when in doubt, blame the media), and that it doesn't signify anything at all -- except (perhaps) that stocks are up over 20 percent from their lows.

You may even recall how much some yelped back in 2001 when the major indexes all got to more than 20 percent below their closing highs. That didn't mean that stocks were in a bear market at all, they said. The secular bull trend was still intact. They had stochastics to prove it. They were wrong.

The point is that rules of thumb -- even ones said to be made up by guys without sliderules -- probably exist for a reason. Sure, the 20 percent up rule is arbitrary (why not, say, 21.63 percent?), but it says something. Stocks go up by that much, something's definitely going on. Stocks go up by that much, you can be pretty sure there are buyers out there who think the bull is back.

What would it take to convince the majority of Wall Street that the market's star is back in the house of Taurus? Probably to see the S&P break through the top of the range that's held it since last July. As it happens, the index is almost there. Monday, it broke past its December high to close at 947.95. Its August high of 962.7 is just a stone's throw away.

But getting through that August level will be no easy trick. Many traders firmly believe that the market is rangebound, and now that it is near the top of its range they are anxious to cash in. It will take a lot of buying power -- a lot of believers -- to push the index past that selling pressure.

If the S&P does bust through that August high, many investors who have been waiting on the fence could move into the market, and many investors who are short the market could throw in the towel. If this happened, the market would take yet another big hop higher and everyone would start talking about the new bull market. Heck, a major news magazine might even decide to run with a cover story with some schmaltzy headline like "A brand new bull."

That would probably be a sign to sell.  Top of page

-- Justin Lahart is a senior writer at CNN/Money covering markets and investing.

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