And the Bear Goes On . . .

Gloom and doom. The bears on Wall Street are viewing any stock market recovery as a temporary blip and are advising investors to sell into any rallies. The crisis over Lehman Brothers, AIG, Merrill Lynch, and others may be just the beginning, say the pessimists, with more bank failures and mergers on the horizon (see today’s purchase of Wachovia by Wells Fargo) and a bear market that still has a way to go on the downside. They point out that in an average bear market, stocks drop by 32%, more than the current downturn of around 27%.

As dark clouds cover Wall Street, some wonder if there is any reason for the few optimists left to take heart. There may be, say some market watchers, who see the excess of negative feeling itself as a positive sign. Historically, a large majority of bears or bulls among money managers has often been a contrarian indicator; the optimists point out that most institutional investors were overloaded with equities a year ago, just before the carnage began. Another positive is that the landslide in stock prices brought oil prices down with it, which could mean a lower inflation rate and an uptick in the economy. Mortgage rates are also trending lower, which could inject some needed strength into the housing market and put more money into the pockets of consumers who refinance.

Optimists also quote the rather grisly Wall Street maxim that the time to buy is when blood is running in the streets. The theory behind the quote is that when things get this bad, just about everyone who wants to sell stock has already sold it, and even more bad news won’t push prices down much further. Any good news, on the other hand, could turn sellers into buyers, igniting a market lift-off.