Reduce Equity Exposure

S&P: Given the current uncertainties, it would be prudent to increase cash that can be utilized as opportunities arise later on

By Arnie Kaufman

For the second time this year, we're suggesting cutting back stock holdings and adding to cash. We expect improvement in the market later this year and into 2003, assuming earnings don't fall too far short of estimates and worries subside somewhat. For the near term, though, stocks may remain under pressure.

Investor confidence will continue to suffer from the threat of additional terrorism, a possible war with Iraq, the frightening game of chicken being played by India and Pakistan, the impasse in the Middle East, and the damaged credibility of U.S. corporations and Wall Street. We see a continuation of the cycle of nervous investors dooming rallies and failed rallies reinforcing investors' fears.

While the economic recovery is on target and stocks are already down sharply, catalysts for a sustainable advance remain absent. In the current environment, good economic and earnings news isn't able to boost stocks for more than very brief periods. A selling climax that clears the air is a possibility. But no evidence has yet been seen of the panic and indiscriminate dumping that brings on such an event.

Following the recent breakdown of the early-May lows on the S&P 500 and Nasdaq Composite, S&P chief technical analyst Mark Arbeter feels there's a good chance the indexes will hold at the bear market lows of last September. That's about where the "500" and Nasdaq met support in 1998, when institutions saw attractive values and began buying. But Arbeter doesn't think a rally off the low will carry very far, and he suspects the final low, though not necessarily the lowest low, will occur in the fall.

Given the current uncertainties, it would be prudent to increase reserves that can be utilized as opportunities arise later on. Our recommended asset allocation is now 55% equities (down from 60%), 20% bonds (unchanged) and 25% cash (up from 20%).

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

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