A Wobbly Start

The near term still remains uncertain, as stock market leadership has not rotated to fresh favorites

By Joseph Lisanti

After a strong finish in 2004, the stock market got off to a wobbly start this year. Although most of the January losses in the S&P 500 were recouped by February 11, we remain cautious for the near term. Volume on advances is still not particularly robust, indicating to us that many of the institutional players remain on the sidelines.

Mark Arbeter, Standard & Poor's chief technical strategist, notes that gains in utilities, energy, and natural resources issues have caused much of the recent improvement. Arbeter believes that one of the key factors driving bull markets higher is institutional money rotating out of older favorites and into the latest momentum plays. Since the "old favorites" remain the current favorites, the bullish pattern isn't evident yet.

There has been recent strength in the "500" and the Dow, which may be poised to break out to new recovery highs. But the weaker action in the Nasdaq suggests more basing will be needed before the next leg of an advance can begin, according to Arbeter.

Money doesn't appear to be leaving the stock market in search of alternatives. In part, we believe that is because other investments do not look attractive at this point. The 10-year Treasury note recently offered a yield of 4.1%, down from 4.25% in mid-November. Gold, another investment alternative, has slid almost 8% from its 2004 high.

But interest rates on the short end of the yield curve are up, thanks to six boosts by the Fed. That makes money market funds and bank accounts more viable parking places for the cash of investors unsure of the current trend.

By the end of the year, Standard & Poor's economists expect the 10-year Treasury note to be yielding about 5%. That could provide more competition for the assets that would otherwise go into stocks. Even so, we expect that there will be profits to be made in the 2005 market.

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

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