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Stocks Acting Well

By Joseph Lisanti The market's resilience in the wake of Hurricane Katrina has been impressive. Much of the advance in stock prices came as oil declined from its surge after the storm struck. We expect stock market activity to be bumpy in the weeks ahead, but still see the S&P 500 up from its current level by the end of 2005.

According to Mark Arbeter, Standard & Poor's chief technical analyst, the S&P 500 took a strong bounce off major support at around 1200. Robust volume on up days is another indication that stocks are likely to head higher in the near term, he says. Arbeter sees the "500" advancing to about 1245, the early-August high, in this move. But he sees solid intermediate-term trendline resistance at 1253. Once stocks bump up against that potential ceiling, Arbeter expects at least a small pullback.

On a technical basis, crude oil looks overbought, says Arbeter. He expects the current price correction in oil to send it down to between $50 and $60 a barrel. But don't look for energy to remain that cheap for very long. Arbeter sees this decline as only a brief countertrend move within a long-term bull market for oil.

We think that this dance between the price of oil and the value of stocks is likely to continue for a while. Damage from Katrina is still being evaluated, and an accurate picture of the effects on the U.S. economy may not be known for some time.

Nevertheless, oil now accounts for a much smaller percentage of this country's gross domestic product than it did in 1981. We don't see this catastrophe derailing the economy, though it will likely slow growth in the short run.

A year ago, few people expected oil to be priced this high. But the American economy appears to have adjusted to higher energy prices, and we think that augurs well for stocks. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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