Is the bear market over?

It is. It ended Oct. 9, according to Baltimore's Bill Miller, the best mutual fund manager in Maryland and maybe the whole country.

The market's rally since then marks the turning point in the cycle, said Miller, who runs the Legg Mason Value Trust, a $9.3 billion fund that has outperformed Standard & Poor's 500-stock index 11 years running, a record unmatched in the mutual fund industry.

Miller is on his way to a 12th victory over the S&P, but his string was at risk until the market turned around. For the first nine months of the year, Legg Mason Value Trust was down a tiny fraction of a point more than the S&P index.

Since then, the stocks in Miller's portfolio have streaked ahead of the S&P. Legg Mason Value is up about 45 percent since Oct. 9, while the S&P 500 has gained 21 percent.

The bears took big bites out everybody early in the year, however. Unless December is a Wall Street record-setter, the stock market -- and Legg Mason Value Trust -- could have its third consecutive losing year.

Legg Mason Value is down about 13 percent this year, the S&P is off 17 percent, the Nasdaq Stock Market composite index is down 23 percent and the Dow Jones industrial average has lost about 11 percent.

The bear market that began in March 2000 vaporized about $8 trillion in the 30-month slide that ended -- if indeed it did end -- in early October. That loss amounts to about 85 percent of the U.S. economy's total output this year, which is equivalent to the loss during the stock market crash that began in 1929, Miller noted.

"Beating the market" in times like these is mostly a matter of being more nimble than others and avoiding being swept away by the avalanche. But if the market has hit bottom, the game is going to change -- to the benefit of skilled stock pickers like Miller.

"It's a market that I think will repay careful analysis," he said in a telephone interview last week.

To capitalize on the turn, Miller and co-manager Nancy Dennin are remodeling the Value Trust portfolio. They've moved out of defensive positions and into stocks they think will benefit from the rebound and are relative bargains.

In the credit card business, for example, they've sold MBNA Corp., the big Delaware credit card bank, and bought Capital One Financial Corp. of Falls Church, another major player in the plastic business.

MBNA's stock has held up relatively well this year and is off only about 9 percent since January. But Capital One shares have been hammered -- down 37 percent so far this year -- by worries about its loan quality, fed by federal banking regulators who forced the company to change how Capital One handles its growing bad debts.

"We believe the stock [of Capital One] is worth about 50 percent more than its current value," Dennin said in the fund's third-quarter report to shareholders.

"Investors have overreacted, in our opinion, to a memorandum of understanding from their regulators, and to an increase in the company's delinquency rates and charge-off levels."

Buying Capital One at a time when the company's critics insist its credit problems could worsen is a gutsy call, but contrarian picks like that are what is required to outperform the market.

The fund also moved back into the battered electric utility business by buying shares of Duke Energy Corp., which lost half their value when the Enron scandal and falling wholesale energy prices scared investors away from all utilities.

Calling Duke's price at the time of the purchase "a trough valuation," Dennin offered a similar explanation for buying General Electric Co. and GM-Hughes Electronics Corp., the company that owns DirectTV, the biggest of the satellite-television services.

GM-Hughes shares were trading at a five-year low, and after GE shares fell from more than $32 a share to the low $20s, it too looked like good value.

"While we have long admired management and have been impressed by the returns they have generated on their collection of businesses, the stock had always traded at a premium to our assessment of intrinsic value," the quarterly report said. "When the stock traded to the mid-$20 level, we began buying, as we believe the stock is worth in the mid-$30s and has very little downside risk."

Reading the fund's reports and listening to Miller's elaboration, the process of selecting stocks and declaring the end of the bear market sounds disarmingly logical.

Not everyone agrees. While the Legg Mason manager was calling a bottom last week, Steve Young, senior market strategist of Banc of America Capital Management, reached a different conclusion.

"While the S&P 500 has risen 20 percent above its Oct. 9 low, and such a gain has normally defined the end of a bear market cycle, it seems the bear still lingers nearby," Young said.

The S&P staged a 20 percent rebound in July and August, but wiped out that gain en route to the October turning point.

While Young said "the worst of the bear market is behind us," he cautioned that the market has been erratic and there is still a risk that stocks will retreat again.

Miller agreed that the markets this year have been more volatile than ever. In the third quarter of this year, there were 26 days when S&P 500 moved more than 2 percent. In the five years ending in 1996, there were only 10 such moves.

That volatility itself is a key signal the market has turned, Miller said. "When you have sustained high volatility, that is a sign of a directional change."

When the Dow drops 173 points one day, then soars 255 points the next as it did last Tuesday and Wednesday, "it indicates extreme emotions," he said. One day's dose of economic data was all it took to trigger that swing. It shows, Miller said, that "people all are piling in to do exactly the same thing."

At first blush, such erratic moves suggest the market is not working well because it bounces around so much. In fact, Miller argued, the rapid moves are evidence that "in the short run, the market has become hyper-efficient."

In calmer markets, short-term traders might spot an event that influences the price of a company's stock and make money as the share price adjusts to the news over the next few sessions.

Nowadays, the market reacts too fast for most traders. "When news hits, when information enters the market, the price adjusts so rapidly there is very little opportunity to react to the news," Miller said.

Despite the obvious danger of making investment decisions when the markets are moving so erratically, more and more investors are willing to take the risk, he said.

"This market reflects the fact that people want to take more risk," which Miller said represents a fundamental change in investors' attitudes. "They had screwed down their risk tolerance to a very low level. The willingness to take on more risk has made the market go up."

Miller said investors' increased tolerance for risk and the market's hyper-efficiency mean that that the stock market already has taken account of the biggest threat looming in the future: the fear of war with Iraq.

"The war is in the market," Miller said. Its impact has already been factored in by people who have been buying stocks in the past two months.

"We had much more uncertainty in 1991 with the Gulf War than we do today," Miller said. "This time the outcome is a foregone conclusion."

If he is right, that is good news for investors, but not so good for Saddam Hussein.

Fund manager Bill Miller says analysis will be rewarded.