Will slide wake up the bear?

NEW YORK — Now that the Dow Jones industrial average has shed 6.1 percent since the year's high on May 10, it's time to ask the question: How do you distinguish a short-term stock market correction from a full-blown bear market?

You wait awhile, of course. But already there are clues in technical market data, such as who is doing the buying and selling, the price of stocks relative to corporate earnings, inflation data and the length of time since the last recession.

Corrections, defined as a drop of 5 percent over a few weeks or a month or two, are common. Since 1900, the Dow has fallen at least that much more than 300 times, or an average of more than three times a year, according to Ned Davis Research.

But 90 percent of such slides bottom out and rise again. It's the other 10 percent that scare the pants off investors.

Those slides turn into bear markets, in which the broad market indicators lose 20 percent or more and take their sweet time coming back.

Even the professionals have trouble telling the two apart. In 2005, the Dow dropped more than 800 points — 8 percent — in March and April before rallying, then dropped 400 points in September and October before climbing. In both cases, investors who fled prematurely would have suffered losses and missed another good rise.

On the other hand, analysts were confident in 2000 and 2001 the market was simply resting and would soon resume its dizzying climb. None of the major indicators has ever returned to its early 2000 highs.

"Picking the short-term movement of the stock market is like standing at the roulette table and saying, 'I think red is coming up next' and then congratulating yourself when you are right," said Andrew Smithers, a British economic consultant.

Federal Reserve Chairman Ben Bernanke spooked the equity markets this week with comments that suggested the central bank is concerned about inflation and is likely to continue to raise interest rates.

That prospect raises fears that a much tighter money supply could push the slowing economy into recession.

"There's some panic in the street," said Al Goldman, chief equity strategist for brokerage firm A.G. Edwards, "but I don't feel it's justified. ... We don't have any signs that a recession is at hand, and inflation, although it's up, is still pretty well contained."

George Feiger, who runs Contango Capital Advisors, looks at the same signals and sees trouble.

"All the technical indicators are showing that we must be getting near the end. The economy is slowing down, the dollar is tanking, people are pulling their money out of equities and putting them in cash, huge amounts of debt have been issued by below-grade [high-risk] issuers," he said. "Where else can it go? The real question is not where will it go but how far?"

Interviews with nearly a dozen economists and market analysts turned up varying views on whether this market correction will develop claws.

Charles Biderman, chief executive of TrimTabs Investment Research, argues that the real answers lie in mutual-fund flows and in whether companies are spending money to buy their own stock or that of other companies as part of a merger.

He noted that at the market peak in early 2000, individual investors piled into equity funds but that companies were net sellers of stock.

By contrast, at the bottom of the last bear market from June 2002 to February 2003, individuals pulled $100 billion out, while companies were net buyers by $30 billion.

"Typically, individual investors are always wrong," Biderman said, "and ever since the mid-1990s, for every year when companies were net buyers of their own shares, the market has gone up."

Right now, Biderman notes, companies are again net buyers. He calculated that 135 companies announced last month a total of $63 billion in stock buybacks and $40 billion more in stock purchases as part of takeovers.

James Paulsen, chief investment strategist for Wells Capital Management, also predicts good times ahead for buyers.

He argues that corporate profits and consumer spending are still relatively strong.

But some analysts worry that high energy prices and the possibility, also mentioned Monday by Bernanke — of a cooling economy could combine to make it harder for companies to post strong earnings growth.

"Earnings are going to be a little harder from now on," said Peter Jankovskis, director of research for OakBrook Investments.

Though he thinks the current drop is a correction rather than a bear market, he said small investors with extra money in their pockets might put it in a money-market fund or high-interest bank account until the trend becomes clearer.

On the other hand, investors already in equities shouldn't run for the exits, experts say.

"The worst thing that can happen is that people panic at the bottom, and it takes them a year or two to get over that panic," said Ken Tower, chief market strategist for CyberTrader, a Charles Schwab Co. subsidiary.

"By that time, you've missed most of the next bull market," Tower said.