Are the bulls – including the herd of individual investors who so far this year have scooped up an estimated $130 billion in equity mutual funds – too upbeat?

Common sense would seem to suggest that the recent wicked one-day stock declines are flashing a message that something is awry in the marketplace, and that it transcends simply a minor correction following a 10-11% run-up in some key market averages between October and May.

Despite the severity of the declines, the bulls are far more conspicuous than the bears. One skeptical money manager, Edward Cianello of Los Angeles based MCR Associates, argues that “the sunshine brigade is ignoring the real world by assuming the major worries besetting the market are soon destined to turn into nonworries.” Many bulls, he contends, have imagined “a best of all worlds” scenario that seriously lacks credibility because it fails to factor in the possibility of shortfalls. “If investors want to dream the impossible dream, let them go see ‘Man of La Mancha’; don’t expect it on Wall Street,” Mr. Cianello says.

Based on what he’s read and what some members of the bullish fraternity are telling him, the Street, he says, is riddled with an excessive number of overly optimistic viewpoints, many of which, he believes, are not only open to serious question, but border on the absurd. Among them, he says:

* Oil (now around $70 a barrel) will drop between $40 and $50 within the next six months or so because of a more than abundant supply of oil and gas.

* Inflation is contained.

* Increases in short-term interest rates – now at 5% and on a rising trend since June 2004 – are just about over. Key Wall Street economists, though, have been saying precisely the same thing ever since the federal funds rate rose to 4% in November 2005.

* While the economy is in a slowing phase, it will still record a reasonably strong second half, with GDP growth running in the 3.3-3.5% range.

* The Iraq war is winding down and we should soon see a growing and substantial withdrawal of American troops.

* While the Democrats may achieve some gains in the mid-term elections, Wall Street’s darlings, the Re 307 1184 410 1195publicans, will almost certainly still maintain control of the House and Senate.

* Global money managers, having chalked up big gains in the emerging markets, will step up their profit-taking in these areas and plow most of these funds into the more secure American market.

* Higher rates will attract more foreign investors, giving rising support to the weak dollar despite such worries as the swelling budget deficit, a falling dollar, a slowing American economy, and surging debt levels. In contrast, some currency experts predict such investors will be stung by a further dollar decline arising from inflation pressures

* Iran, the world’s fourth-largest oil exporter, will soon scrap its nuclear ambitions. Its day-in, day-out rhetoric on the nuclear front is little more than fear talk aimed at pushing up the price of crude.

* The housing market may weaken a bit more, but there will be no serious break in home prices except in the press.

* Prices at the gas pump of more than $3 will not seriously impair consumer spending; the consumer will simply grin and bear it and cut corners elsewhere.

“To believe all of these concerns will go away anytime soon is totally unrealistic unless you also believe in the tooth fairy,” Mr. Cianello says.

Apparently, though, a fair number of investors are beginning to have their doubts about the predominantly bullish sentiment, as evidenced by sharply stepped-up stock sales. For example, in the week that ended May 24, investors redeemed about $7.1 billion in equity funds, the biggest weekly outburst of such selling since March 2003, according to Charles Biderman, president of TrimTabs Investment Research, a liquidity-tracking service out of Santa Rosa, Calif. Those sales followed an earlier May decline of about 3-4% in some key market averages.

While many bulls believe the recent market weakness is behind us, the chief investment strategist at Wachovia Securities, Rod Smyth, disagrees. For the near term, at least through mid-summer, he sees stocks as being vulnerable to more selling, with the S &P 500 dropping another 3-4%.Why so? Because, he tells me, “core inflation will remain uncomfortably high for the next couple of months, which means the Fed will keep raising interest rates, and that will be a worrisome backdrop for the market.” As such, he looks for stocks to trade at both lower lows and lower highs.

dandordan@aol.com