Further Gains Likely

The market's technical condition is improved, and prospects for an economic recovery are good

By Arnie Kaufman

Confusion has surrounded the bounce in stock prices of the past three weeks in the face of continued unfavorable business news and the threat of additional terrorist acts. But the skepticism may be a good thing. The more doubters now, the greater are the ranks of those who can be converted to buyers later.

Stocks have been rising in the past three weeks because they came down too far previously. The events of September 11 sparked a spell of concentrated selling that left the market in a "sold out" state, a condition that typically produces a rally. By September 21, stocks were primed for a decent move. Short sellers, who had become bolder as prices plunged, were in an exposed position when the rally began. Many hastily covered, adding fuel to the advance.

At the same time, money-market funds were bulging (they still are, to the tune of some $1.8 trillion), while the returns they provided, already paltry, fell further as the Fed rushed to ease monetary policy in the wake of the attacks. With stocks depressed, the Fed easing aggressively and fiscal stimulus in the pipeline, investors thought the time was right to start placing bets on economic improvement down the road.

Stocks stumbled on Friday, October 12. The main reason was a weak retail sales report for September, which wasn't all that much of a surprise to S&P chief economist David Wyss. Disclosure of the fourth anthrax case, in New York City, contributed to the decline.

Also, chart resistance made itself felt, about where S&P technical analyst Mark Arbeter predicted it would, or at 1100 on the S&P 500 and 1670-1700 on Nasdaq. Based on sentiment indicators and market internals such as advancing stocks relative to decliners and downside-to-upside volume, Arbeter believes the rally will resume.

S&P continues to recommend selective accumulation.

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

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