NEW YORK (Reuters) - Lower hemlines are coming back in fashion for spring and that could spell bad news for the U.S. stock market.

The higher the hemlines, the better the outlook for stocks, according to a popular, but frequently disputed, theory. When hemlines drop, watch out -- the Dow Jones Industrial Average is likely to fall, the theory goes.

The past few fashion seasons, short skirts have ruled and, this spring, stocks rallied.

The hemline theory proved on the money as the Dow hit 14,000 for the first time this summer, and the Standard & Poor's 500 Index set a record.

But in recent weeks, stocks have plunged following a jump in foreclosures on subprime home loans for borrowers with poor credit that hit bank credit lines and roiled the bond market.

At this week's fashion show extravaganza in New York, hemlines are markedly lower.