With the American economy limping badly and the stock market floundering, US investors are beginning to wonder how long the hangover from the bull market is going to last and what they should be doing.

Reduce technology stock holdings when you can and catch a stealth bull market which is taking hold in the old economy - that is the advice of Richard McCabe, chief market analyst for Merrill Lynch and one of the most influential forecasters on Wall Street.

This stealth bull market will not be obvious at first, he said in an interview in his office on Friday as the technology-driven Nasdaq index tumbled on bad earnings reports, losing 5 per cent of its value.

It would happen in the non-tech part of the market, which peaked in early 1998 and then slipped around 30 per cent in value - the period known popularly as the stealth bear market, when high-flying technology stocks were getting all the attention.

"During 1999 the vast array of non-technology, non-glamorous, mundane, unimpressive businesses just languished and bottomed out," he said. "Their prices stopped going down but they did not go back up." Last year they began to revive. "Now in early 2001 it looks like more of the same kind that have been very depressed since late 1998 are beginning to strengthen."

He listed aerospace, defence, home building, health-care services, hospital management, pollution control, oil and electric utilities, apparel, domestic fuels, tool-making, machinery and auto parts. Bit by bit these unexciting stocks were recovering, he believed, because people sensed that the economy would revive again later this year - Merrill Lynch forecasts US growth of up to 3 per cent by the last quarter.

"The breadth of the market has been getting better and better," said Mr McCabe. "Each day more stocks relatively are going up than going down and I think it is going to continue. In the next year or two we may start to hear people describe the market as a stealth bull market because even though technology stocks may have rallies now and then, I don't think they are going to dominate the leadership or have a big new advance for quite a while."

In almost 40 years in the business, he had never seen greater speculative exuberance than that in technology stocks in 1999-2000, he said. It peaked in March last year when the Nasdaq soared to over 5,000 before collapsing.

The correction followed the pattern of other declines in that it had three stages. There was the A wave, the initial shock decline when the Nasdaq fell 30 or 40 per cent from March until May. The B wave between May and August saw an interim Nasdaq recovery retracing about half of the A wave decline. Then the C wave set in.

"The C wave is not as vicious or violent in terms of the rate of decline but it takes a lot more time based on historical evidence to be completed," he said. This wave had two components, "one is the down phase, the other is where this price decline begins to bottom out - but it can go sideways and it can go on for years." The Nikkei C wave, he pointed out, has been going on in Japan since the stock bubble burst in 1989.

"I think it will take at least the rest of this year to complete the C wave in technology," he forecast. There could, however, be a late-winter-early-spring rally taking the Nasdaq from the present 2,200-2,400 range back to the low or mid 3,000s, because they are very "oversold".

When this was over the technology indices would fall back again in the spring to summer and approach the recent lows, and then rally briefly again in the autumn.

"As you get these periodic rallies in technology, I would suggest very strongly to look through one's portfolio holdings in technology, don't be overweighted, try to cut back any extraordinarily high exposure to begin with. "Then go through and see what companies' stocks are ones you think you should be in long term, that do have some kind of reasonable evaluation, good earnings prospects, good management, good financial condition, all of that kind of positive stuff, and stay with them.

"A lot of investors may have bought stocks with concepts that sounded so great a year ago, maybe related to Internet or e-commerce. Many have gone out the window and people realise they are dealing with failures or just not very viable companies, and if they still have such stocks in their holding it would be a great chance on any nearby bounce that picks everything up temporarily to try to cut back exposure.

"Get out of those, either switch to a different sector, either energy or financial stocks which I like, or get into another technology stocks where there is a more reliable prospect."