Gains Likely to Be Extended

S&P continues to recommend a positive investment policy

By Arnie Kaufman

The recent breakout on heavy trading volume has turned the intermediate-term trend upward, according to S&P technical analyst Mark Arbeter. But a near-term impediment is the overhead resistance between 1144 and 1174 on the S&P 500, where the market advance stalled last week. Many investors apparently bought stock in that range in the unusually high-volume session of last December 5, sat with losses for over three months and are looking to sell when they can break even. Arbeter would view positively some daily closes above 1180 on the "500." As recoveries from bear markets go, this one had been on the anemic side, but is now catching up to its predecessors. At the five-month point of the rebound (Feb. 21), the S&P 500 had recouped only 21% of the bear market loss, far less than earlier recoveries at that stage. Through Mar. 8, or roughly five and a half months from the Sept. 21 low, however, the "500" had regained 35% of its loss.

The rally since September has had to contend with more than its share of restraints, including continued weakness of information technology investment spending and high p-e ratios, as well as worries about the next stage in the war on terrorism, fallout from the Enron collapse and a possible Middle East blowup.

Also, until recently, it wasn't clear that the recession had ended, and it was widely believed that the early part of an expansion phase would be sluggish. Now, economists are wondering whether there was a recession, and are ratcheting up their GDP forecasts for the March quarter (S&P's chief economist David Wyss currently expects 4% growth).

The surprising vigor of the business upturn has sent bond yields higher and fanned fears that the Fed will soon push short-term interest rates upward. Wyss, who hadn't expected a fed funds hike until August or September, now thinks a boost is possible in June. Nevertheless, with the corporate profits outlook firming, we feel that stocks will be able to extend their gains.

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

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