Don't Break Out the Champagne Yet

S&P still advises near-term caution because strong trading volume has accompanied declines, but not gains

By Joseph Lisanti

Despite advancing on Thursday and Friday, the stock market remains jittery. Bad news seems to be having a greater effect on share prices and volume these days than good news. That indicates to us that some more basing may be needed before stocks can again make a sustained advance.

February 22 marked the sharpest one-day decline in the S&P 500 since August on word that South Korea planned to "diversify" its currency reserves. Although South Korea has reserves of about $200 billion, that is really not much in today's currency market. The concern was not that Korea would be selling dollars, but that China would be inspired to do so. Traders moved to sell in anticipation of any such announcement. As a result, the dollar fell, reaching almost $1.33 to the euro. The greenback rebounded a bit the following day, when Korea said that its diversification would be accomplished via new asset purchases rather than dollar sales.

The other nasty news was that oil climbed above $51 a barrel, within striking distance of last October's $55 price. Oil price gains added to inflation fears, which we do not share.

We believe that the dollar will continue its slide this year, but at a gradual pace. David Wyss, Standard & Poor's chief economist, sees the exchange rate at $1.45 to the euro by the end of 2005. And Wyss expects oil to trade between $40 and $45 by yearend.

The negative headlines have been echoed in the relatively weak technical picture. Although the S&P 500 again climbed close to its December high, it moved up on much lower volume than was seen when it declined earlier in the week. Although the price action in the blue chips has been positive, we would like to see advances on heavier volume.

While we are cautious near term, we still expect stocks to produce moderate gains for 2005. Our yearend target on the S&P 500 remains 1,300.

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

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