Market strategist Bernie Schaeffer, who predicts market activity on the actions of options traders and market sentiment, said recent gyrations do not indicate an end to the bull market.

Mr. Schaeffer, president of Investment Research Institute, a Cincinnati- based investor advisory firm, used technical indicators and gauges of investor attitudes to reach his conclusion that investors tend to overreact to selloffs, creating bigger downturns than the fundamentals warrant.

But Mr. Schaeffer said such skepticism on the part of investors is keeping the market from overheating.

Although he predicts the recent volatility will continue, he is bullish for the long term.

Mr. Schaeffer uses a contrarian approach to predict market gyrations. For example: When brokerage firms suggest a high percentage of stocks for a portfolio, that could be considered a warning sign that trouble is on the horizon.

According to a monthly survey by The Wall Street Journal of 16 brokerage houses, the market allocation recommendation average is below 50%, which is considered slightly bearish, and therefore a welcome sign to Mr. Schaeffer.

Jeffrey Applegate, chief market strategist at Lehman Brothers, agrees. "Typically, when everybody says nothing can go wrong, that's about the time the whole thing will come apart."

"Right now, there are a lot of worries out there-about the Fed, or a resurgent union movement, or the strong dollar. There's a huge list."

Although his long-term view is optimistic, Mr. Schaeffer said some of his technical indicators suggest short-term concerns. The overexuberance in mid-July, according to his research, was responsible for the recent downdraft.

He follows the activity of day traders and speculators, who buy options, known as puts and calls, to form his thesis. A put is a bet that an equity or an index will fall. A call reflects the opposite.

Robert M. Rack, research manager for the institute, said that on July 17 and 18 the company's 10-day moving average of equity put to call ratio slipped to 0.35 puts for each call, "meaning everyone thought the market would continue to rise."

"When this happens, the market tends to underperform its normal average returns for the next 60 days," said Mr. Rack. But the trend takes about 15 days to take hold. The market topped out on Aug. 8, at 8,259, 14 trading days later.

The subsequent 247 point fall on Aug. 15 seems like evidence of this theory at work. But "from sentiment perspective, when everyone is selling, the market usually has reached an extreme and it's time for a rally," said Mr. Rack.

Thus the Dow Jones industrial average gained most of its losses the following week.

An analysis of options trading using the top three banks in market capitalization-Citicorp, Chase, and BankAmerica-indicates banking stocks will outperform their average returns over the next 10 days, Mr. Rack said Friday. "I'm not pounding the table because I'm concerned about bonds, but this is one indicator that suggests the banking index can outperform."

Though banks have been bid up during this bull run, bank stocks still look good to Mr. Rack. "With consolidation still sweeping through the industry and banks looking at brokerages to diversify and expand interest, we're fairly positive on banks."

But, in keeping with the put/call ratio indicator used to track general market activity, Mr. Rack expects "range trading," or lateral moves, and large swings over the next two months. Though it should be a bumpy ride, "the market should resume its upward trend," in the fall, he said.

True to his contrarian reading, Mr. Rack said, when the "crowd is really negative, that's when we get interested."

Mr. Applegate said he won't time the market. "As with most money managers, the name of the game is trying to beat the bogey 12 months forward. I expect stocks to do better than bonds and both to do better than cash," which is why Lehman suggests being fully invested.

He predicts an 8,800 Dow Jones industrial average within 12 months.

Charles H. Blood Jr., director of financial markets, Brown Brothers Harriman & Co., said his company is "in the bull camp. We think the correction is over, and the market will be back to new highs by mid- September."

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