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Stuck in Reverse

By Arnie Kaufman Bulging money market funds and savings accounts hold the potential to lift stocks significantly. The incentive to buy, though, is still absent.

An earnings upswing will provide the motivation to invest in time. With inventories, inflation and plant capacity utilization especially low now and with productivity high, the profit expansion could go on for some time. Currently, however, earnings news, just beginning to improve, is not sufficiently upbeat to offset the negatives, so the erosion of stock prices continues.

The best hope in the near term may be a period of indiscriminate dumping that quickly depletes the backlog of stock for sale and allows the market to gain traction on the upside. The slowness of the profits recovery, the ongoing revelations of business ethics abuses and the intransigence of the Middle East, South Asia and terrorist situations are leading to a sense of hopelessness. It remains to be seen whether the fear that produces widespread selling of stocks develops. The summer vacation months are not when you would expect to see such assertiveness and commonality of action by investors, but it's conceivable that a decisive breakdown of last September's post-terrorist-attack lows could trigger the panic selling. A test of those lows is near.

Most market declines end quietly as a bottom is traced out over a period of time. A capitulation-type low, on the other hand, is dramatic. It would probably look something like this, according to S&P chief technical analyst Mark Arbeter: Prices decline sharply over one or two sessions on exceptional volume of 50% or more above the recent daily level. Breadth is very poor, with at least four declining stocks for each gainer, to suggest that the towel is being thrown in on almost everything. The ratio of put option to call option trading moves above 1-to-1 and stays there for a while, and overall options trading volume and volatility are well above average. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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