Market Watch

[Joemoney]

Optimism to Drive Stocks Higher
By Denise Duclaux

NEW YORK (Reuters) - A growing conviction that the nation's economy and corporate profits are gathering strength will take on a life of its own next week, pushing stocks up as investors worry they'll miss out on the rally.

``We have gotten a string of very good data,'' said Jay Mueller, economist and portfolio manager at Strong Capital Management, which oversees $45 billion. ``Almost everything has come in at or better than consensus. The numbers are good, and you really can't keep it a secret anymore that things are looking up.''

Even Federal Reserve Chairman Alan Greenspan adopted a brighter stance toward the U.S. economy, admitting this week an expansion was ``well under way'' and essentially declaring the recession over. With no blockbuster earnings reports expected and no economic data seen rocking the market, Wall Street's improving sentiment may convince more investors next week to ready their portfolios for a rebound.

``We're coming off a week that has seen very good (economic) numbers and that's very bullish,'' said Larry Seruma, senior equities trader for Barclays Global Investors. ``The economy is turning a corner -- that's the consensus across the board.''

Tensions are still running high, analysts warn, as investors remember a string of false rallies over the past two years. Concern that stock prices are getting stretched and worry over unforeseen events will keep a lid on gains -- especially after four straight winning weeks in the blue-chip Dow Jones Industrial average (^DJI - news).

``Let's remember we are one headline on the tape away from having the market be in a bad way again, with all of what is going on in the Middle East and what is going on in Afghanistan,'' said Charles White, president of Avatar Associates, which oversees $2 billion. ``That probably will keep the euphoria in the market down a bit.''


UPWARD MOMENTUM TO LIFT STOCKS

The technology-loaded Nasdaq composite index (^IXIC - news) has scrambled ahead 7 percent this week, while the broad Standard & Poor's 500 index (^SPX - news) rallied almost 3 percent and the Dow snagged a 2 percent gain. The blue-chip Dow average has surged more than 800 points in the last four weeks as economic numbers land stronger than analysts have forecast.

``Right now, our indicators, especially on a shorter-term basis are still positive,'' said Art Huprich, a technical analyst at Raymond James & Associates.

Huprich added he expected next week's ``triple witching'' -- the simultaneous expiration of futures, options contracts and index contracts -- will make for a seesaw market, but stocks should end higher on the week.

``The backdrop is very positive,'' said A.C. Moore, chief investment strategist of Dunvegan Associates. ``We see the Nasdaq probably outperforming in the near term, because that is where the upside leverage would be on an economic recovery. But I think selectivity is going to be increasingly important.''

Indeed, analysts aren't ruling out bouts of profit-taking as the recent rally triggers concerns stocks are getting too pricey. The price-to-earnings ratio -- a key valuation gauge for stocks -- stands at more than 22 times calendar year 2002 earnings and more than 18 times calendar year 2003 earnings, according to research firm Thomson Financial/First Call. That's below 26 in March of 2000 when the S&P 500 hit its lifetime high, but still above the historical average of about 15 to 16 times forward earnings.

``There are certainly things lurking out there that give one cause for reflection at these levels,'' White said.


MORE GOOD NEWS EXPECTED ON ECONOMY

Greenspan's upbeat assessment this week came amid a flurry of reports, including a drop in the jobless rate and a jump in orders in manufactured goods, that point to the end of a recession and the start of a turnaround. The rush of solid data is expected to continue next week. But analysts caution a mild recovery will follow the mild recession that began last March.

``I don't think there is a whole lot of dried tinder to feed a kind of explosive recovery, but I don't think we have severe headwinds either,'' Mueller said. ``So I think we are going to get a fairly middle-of-the-road recovery.''

On Wednesday, the Commerce Department will release retail sales for February. Retail sales are expected to rise 0.9 percent, reversing a dip of 0.2 percent in January, according to economists polled by Reuters. Stripping out sales of autos, economists expect retail sales to climb 0.5 percent, compared with a jump of 1.2 percent in January.

On Thursday, the government will report January figures on business inventories. Economists expect the inventories of U.S businesses to fall 0.3 percent, compared with a drop of 0.4 percent in December.

On Friday, the government is slated to release producer prices -- prices charged at the factory door and farm gate. The U.S. Producer Price Index is expected to inch up 0.1 percent in February, matching a 0.1 percent rise in January, according to a Reuters poll. Excluding volatile food and energy prices, producer prices are forecast to edge up 0.1 percent in February after shedding 0.1 percent in January.

http://biz.yahoo.com/rb/020309/business_column_stocks_outlook_dc_1.html