Consolidation of Gains

The recovery appears to have further to go

By Arnie Kaufman

We at S&P were hoping for a stronger follow-through to the recent upswing, to give the rally additional traction. With the economy struggling and earnings unimpressive, good market action seems to be the only avenue just now to improved investor confidence.

But institutions, after a round of stock buying, don't show a lot of urgency to add to positions. That was the message delivered by weaker upside-downside volume readings on the NYSE and renewed interest in Treasury notes and bonds late last week.

From a technical standpoint, the resistance the market encountered was not surprising. S&P chief technical analyst Mark Arbeter said the pause appeared about when it should have -- after a 50% retracement of the preceding loss (the decline from the August peak to the October low) and as the market indexes reached their 50-day exponential moving averages.

The ranks of those who see this rally attempt failing are large. "I told you so" was heard repeatedly amid last week's profit taking. That doesn't help in establishing upside momentum now, but it can be interpreted as an eventual positive for the market. Skepticism following a bounce often means that demand is not exhausted, that there are still potential crossovers to the bullish camp. Certainly, existing cash reserves are sufficient to support higher stock prices.

Whether or not a new bull market has begun depends on how economic and corporate data, technical conditions and geopolitical developments unfold. For now, though, we feel that a reasonable initial upside target on the S&P 500 is 950 to 1000, compared with the current level of 897.

A portfolio of 60% equities, 15% bonds and 25% cash reserves seems appropriate.

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

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