An Encouraging Performance by the Market

The war isn't over, but the bulls have won a hard-fought battle

By Arnie Kaufman

Support developed last week whenever stocks began to slip, in contrast to the snowballing sell-offs of recent months. For the first time in a long while, moreover, the impact of unfavorable earnings news and analyst downgrades was limited to the shares directly affected and was not all that severe.

Investors rotated into technology and away from defensive issues. If a bit belatedly, they were picking up stocks that had been beaten down by year-end tax selling and portfolio window dressing. Significantly, the demand for techs also indicated a long-lacking willingness to take on risk, as well as improvement in a sector that embodies the new economy and is vital to resumption of the bull market.

The war isn't over, but the bulls have won a hard-fought battle. If they eventually prevail, the victory could be all the more rewarding for its difficulty. Wounds from a clash in the trenches can sap the strength of the vanquished for some time. Saucer-shaped bottoms are no less meaningful than "V" formations.

So-called market internals, such as 52-week highs vs. lows and upside vs. downside volume, have strengthened considerably, according to S&P technical analyst Mark Arbeter. The risk is that, fanned by politicians and the media, business and consumer worries about a recession will be self-fulfilling. S&P economist David Wyss puts the chances of a recession at 40%. He believes it will be staved off by a further full-percentage-point cut in the fed funds rate by summer and a tax cut at midyear retroactive to January 1.

Nevertheless, investor confidence in the period ahead will be tested strenuously by the slowing economy and earnings disappointments. Despite recent positives, it would be prudent to hold off deploying additional reserves for the time being.

Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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