Sunburned

On Wall Street, they're talking about a summer-long rally as though it were some kind of birthright. Right on cue, the wags note, stocks began shooting higher after Memorial Day. We've survived April showers, or as was the case this year, an April deluge; sunny days must lie ahead. I sure hate to warn of more rain. But the annual summer rally that traders often speak of is unspectacular at best, and this year there's this little matter of being in a bear market.

Oh, yeah. A bear market. Check out the chart. The Dow Jones industrial average, which hit an all-time closing high of 11,723 on Jan. 14, has sunk as much as 16% and in sawtooth fashion has been hitting lower highs since March. The NASDAQ got it much worse. Yes, the rally we've been enjoying the past few weeks has been impressive, fueled by unexpectedly weak economic reports that have, for now, rubbed out inflation fears. Possibly this rally will persist and break the bear-market pattern. But it hasn't yet. Don't rush to redeploy all your cash.

For starters, let's debunk the summer rally. It's true that the market always rises after Memorial Day. But how could it not? Traders define this rally as the difference between the May or June low and the highest point reached in July, August or September. By that measure there is a rally not just every summer, but every season. And get this: seasonally speaking, the summer rally is the least exciting. Yale Hirsch, editor of the Stock Trader's Almanac, studied seasonal Dow moves back to 1964 and found that, on average, the summer rally was good for a 9.7% gain. But the autumn rally--August or September low to the high reached in October, November or December--averaged 10.4%. The winter rally averaged 14%; the spring rally 10.5%.

So much for a warm-weather boost. More critically, the sharp rise in stocks looks suspiciously like a bear-trap rally, the kind that draws money from the sidelines as investors worry lest they miss out on a new bull market. Alas, these bounces, called suckers' rallies, prove short-lived and end in despair. Money drawn in near the top vanishes amid new lows on the major averages.

How can you know if this is a suckers' rally? You can't. But note this: the NASDAQ's scintillating 19% gain Memorial Day week came on modest volume, and advancing stocks were roughly even with those falling--a tepid showing that suggests this rally could fade like a suntan. Don't be fooled by the sharp gain. Since 1900, there have been 31 bear markets, and in 17 of them there was at least one suckers' rally greater than 10% on the Dow, according to Ned Davis Research. All but one had at least one 5% bounce. The typical bear market had five 5%-plus rallies followed by new lows.

I'm predicting nothing here. If the economy is really slowing and Fed Chairman Alan Greenspan stops raising interest rates, the bull market may be coming back to life. But it's way too early to conclude there is a meaningful slowdown. Greenspan will want months of data before he's convinced. We've only had weeks. And bear markets are tricky. Rallies are typical. They prove nothing. Hence my concern.