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Some Hopeful Signs

By Arnie Kaufman At this point, there's not a great deal to distinguish the rally of late last week from earlier attempts to break the bears' grip. The bounce began at a support level, the July intraday low of 775 on the S&P 500. It came after sentiment reached oversold extremes. Negative news, this time related to retail sales and consumer sentiment, failed to prove an impediment. And trading volume picked up on the gains. But all that has happened before without leading to a sustainable upswing.

What's different? The rebound occurred at even lower stock price levels, with valuations more reasonable. It began in October, a traditional bottoming-out month. One-third of all of the 10%-plus declines in the S&P 500 in the postwar period ended in October. And cash reserves are higher.

Investors' fears have reached the point where reasonable economic expectations are being discounted significantly. One stock sector after another has gotten hammered recently, beyond what the fundamentals call for. Auto, retailing, utility, transportation and consumer finance issues have been among the latest casualties.

Even the value of assets other than equities is being questioned. Homes are up sharply in price, while delinquencies and foreclosures are rising. High vacancy rates are pressuring commercial real estate. Treasury notes and bonds offer paltry yields and face market (interest rate) risk down the road. Reduced tax revenues could hurt municipals. The creditworthiness of many corporate bonds in the midst of the sluggish economy is now being challenged.

That's why so much cash has been flowing into money market funds, savings accounts, short-term CDs and T-bills. This means that, once the tide turns, the stock market has a huge amount of potential fuel for an advance.

Several more sessions of upward-trending prices on heavy volume are needed to restore investor confidence. Still, we would consider

dollar cost averaging in attractively valued issues. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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