Waiting for Test Results

The market remains at an important juncture

By Arnie Kaufman

The testing of the lows of this summer has thus far been inconclusive. The Nasdaq undercut its low by 2%, before rebounding. But that's within the acceptable margin of error, according to S&P chief technical analyst Mark Arbeter. The S&P 500 started to rally 3% above its July low, though it was slipping back late in the week.

The current test could be important. If the latest lows hold, a double bottom would emerge. That chart pattern often precedes a sustainable advance.

A number of sessions in which prices rise sharply on heavy volume are needed for a recovery to establish itself, says Arbeter. Before regarding a reversal pattern as complete, he would want to see the S&P 500 (now 827) above January's recovery high of 965.

To be sure, scores of rallies have failed amid a dearth of follow-up demand in the last couple of years. So, clearly, the burden of proof now rests with the bulls.

Institutions have to step up to the plate. Their buying has been unimpressive lately, even though depressed stocks and inflated T-bonds call for asset re-allocation in favor of the former.

Foreigners continue to see investing in the U.S. as unappealing in view of our growing trade deficit and overvalued dollar, as well as the costs and dangers implicit in a U.S.-led fight against Iraq.

Investors are wary about earnings, as companies' revenues are growing slowly and selling prices remain under pressure. Also, corporate contributions to pension plans based on more realistic investment return assumptions promise to become a drag on results.

The economy, nevertheless, is in the early stage of what could prove to be a multi-year expansion, bringing with it substantially higher earnings in time. And after one of the worst market declines in modern history, considerable pessimism is already baked into stock prices.

We would view any further weakness as a long-term buying opportunity.

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

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