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Encouraging Signs

By Arnie Kaufman Economic transitions are bound to produce contradictory data and investor jitters. We are encouraged, though, that sell-offs are meeting support before they can gather momentum. This suggests to us that the negatives are already factored into stock prices.

In addition, we expect the Fed to lower rates a good deal further, and an accommodative Fed is generally a major market plus. S&P economist David Wyss believes that, with the help of an additional half- to full-percentage point cut in the fed funds rate, the economy will skirt a recession. While looking for little GDP growth in the first half and worried that corporate profits may come in below current expectations, Wyss points out that the market tends to anticipate improvement in the economy by an average of four to six months. He feels, therefore, that the present is a good time to be accumulating stocks.

Potential fuel for an advance exists in the substantial cash on the sidelines. And three months remain to the November-April period, in which stocks historically have scored most of their gains.

On Nasdaq, the index that is key to the market's health, price and volume movements lately have been favorable, according to S&P technical analyst Mark Arbeter. When Nasdaq slips, trading falls off, but when the index rises, volume expands, a sign of accumulation. Arbeter believes Nasdaq, now 2660, is headed for a test of the 3000 level, where the charts suggest heavy resistance will arise.

A pattern of ascending peaks and troughs on both Nasdaq and the S&P 500 is emerging. If the trend develops further, it will indicate that selling into rallies is no longer a profitable strategy.

We advise keeping stocks at 65% of portfolios. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook.

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