Too Early to Celebrate

The jury will be out for a while on whether the recent bounce represents a major turning point

By Arnie Kaufman

Note: The Outlook column will not be published on July 5. It will return on July 12.

Stocks last week met buying support at levels that in the past have attracted considerable institutional demand -- the lows of the S&P 500 and Nasdaq Composite last Sept. 21, which approximated the lows of August, 1998. Some time will be needed, however, to tell whether the rebound is the start of an intermediate-term advance.

We were hoping for a clearly identifiable climax brought on by the disillusionment accompanying the loss of all of the gains registered from September through January. But trading didn't reach climactic proportions, despite accelerated selling right after the WorldCom accounting fraud announcement. It may have been that with so many people looking for a capitulation-type turnabout, many of them held back from the wholesale dumping that produces such an event.

The practice of selling into rallies has become well entrenched in recent months and the chart patterns of many bellwether stocks are quite poor, so turning the market's tide won't be easy. Last week's action may be nothing more than a spell of short covering and bargain hunting, to be followed by renewed decline.

On the other hand, it's conceivable that we saw the second part of a double bottom, with an upward leg ahead. According to S&P technical analyst Mark Arbeter, a period of institutional accumulation of stock is needed to confirm that a significant upswing is unfolding. The accumulation would show up in a rising trend of prices on noticeably increased trading volume over a couple of weeks.

Arbeter is pleased that there were fewer individual stocks posting 52-week lows at last week's bottom for the S&P 500 than at the Sept. 21 bottom for the index. That's typical of a double bottom. He would now like to see investor skepticism, as reflected in the put-call ratio and similar indicators, stay high during any further rally. A high ratio of put options purchases to call options buying would be a sign that doubts persist, buying power remains and the upswing in prices is sustainable.

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

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