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Change Your Allocation

By Joseph Lisanti The S&P 500 index has traced a zigzag pattern so far this year. On Mar. 4, it finally closed above its previous recovery high of 1,213.55 set in December.

This year may see a great deal of back-and-forth action by stocks, as market participants try to puzzle out growth in the economy and in corporate profits. We believe that both are likely to slow, but not enough to derail stocks. The slowdown, however, may be enough to restrain investor enthusiasm. As a result, we continue to have a yearend target of 1,300 for the S&P 500 index.

Despite the recent advance, for the near term, we believe that European stocks offer somewhat better potential reward for the risk incurred. Mark Arbeter, Standard & Poor's chief technical strategist, notes that major indices of European stocks, including Britain's FTSE, France's CAC 40, and Germany's DAX, have broken out to new multi-year highs in 2005. In contrast, the Nasdaq Composite is still almost 5% below its December peak. Arbeter believes that the Nasdaq must confirm the advance in U.S. blue chips for the nascent rally to have staying power.

Aside from the positive technical picture in Europe, there is the economic reality that the U.S. dollar has declined and, we believe, is likely to descend further before the year is out. Standard & Poor's economists think that the euro, now about $1.31, will rise to between $1.45 and $1.50 by the end of 2005. That projected dollar decline of between 10% and 15% is more than the gain we currently expect for the S&P 500 index.

Because of the weakening dollar, we advise U.S. investors to move 5% of assets from domestic stocks to foreign. To effect this change in our model portfolio based on exchange-traded funds, move 5% of assets from the S&P 500 SPDR (SPY) to the iShares S&P Europe 350 Index (IEV). Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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