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Still on the Defensive

By Arnie Kaufman Rallies aren't able to get very far. The pattern of descending peaks and troughs that has emerged since mid-May makes traders feel comfortable selling into strength. Buyers are being deterred by the paucity of evidence of economic and corporate profit improvement.

Seasonal precedents for the period ahead aren't offering much encouragement, either. From 1996 to 2000, net cash inflow of stock mutual funds was, on average, lower in August than in any other month of the year. Vacations probably had something to do with that. Also, investors may have been afraid to put money to work that month because of the market's well-known September-October woes. Since 1928, September has been the worst month for the S&P 500 index, with an average loss of 1.1%. October has seen some of the sharpest plunges, often marking the end of a correction or bear market.

S&P technical analyst Mark Arbeter would not be surprised to see the market's March/April lows tested in September or October. Indeed, he points out that a successful test would mirror many prior experiences of double bottoms that were spread three to six months apart and set the market up for good recoveries. Arbeter says the rebound is typically more vigorous the longer it takes for the second low to occur. That's because the base is broader and stronger and because investor impatience increases and tends to push sentiment indicators -- which are viewed in a contrary manner -- further into bullish territory.

The fundamentals, meanwhile, should gradually improve. The tax rebates will boost consumer spending in coming months and the Fed's interest-rate cuts should start to bear fruit late this year or early in 2002.

While these are trying times, we at S&P continue to advise a policy of selective accumulation. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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