Momentum could fade

Analysts caution October's sharp gains
are unlikely to continue

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By Hope Yen
Associated Press

NEW YORK >> It was what investors wanted to see: After hitting five- and six-year lows, the market stages a stunning October rally, raising hopes the month would live up to its reputation as a bear killer.

But analysts say investors shouldn't declare a bull market just yet. Sparked by third-quarter corporate profits that beat lowered expectations, the rally was sustained mostly by buying momentum. That could spell some trouble once investors return their attention to the soft economic recovery.

"During the reporting month, investors just focused on, 'Did companies beat the number,' when earnings expectations were already ratcheted down," said Bernie Schaeffer, chairman of Schaeffer's Investment Research in Cincinnati. "I think we're seeing a relief rally."

Schaeffer sees some market advances in the weeks ahead, but predicts stocks could hit new lows as investor giddiness over the better-than-expected earnings season fades.

"I continue to view the fundamental backdrop as negative and risky," he said.

The Dow Jones industrials and Nasdaq composite posted their third straight weekly advance yesterday, a distinction not seen since the period ending Aug. 23, after snapping a six-month losing streak Thursday.

The October rally, which pushed the Dow more than 1,100 points after hitting a five-year low on Oct. 9, gave blue chips their second strongest October percentage gain ever, rising 10.6 percent. It was the Dow's strongest monthly advance since 1987.

But much of the gains came on two weeks of better-than-expected earnings. Investors then shook off a series of bad news this past week, including reports showing consumer confidence at a 9-year low as well as weak employment and consumer spending.

"I am a little surprised the market is a strong as it is given the economic numbers," said Brian Bush, director of equity research at Stephens Inc., earlier in the week. "This market for the last three to four weeks has shown an impressive ability to look past negative news."

That market resiliency is sure to be challenged this month, particularly with midterm elections on Tuesday and the Federal Reserve meeting, where it will decide whether to cut interest rates, on Wednesday. A possible war with Iraq also continues to weigh on the markets.

And another round of data on monthly retail sales and leading economic indicators, which are expected to show mixed results, promises to fluster investors.

"Investors will continue to be confused," said Scott Wren, equity strategist for A.G. Edwards & Sons, who believes the market in November could be topsy-turvy but will continue its overall trend upward.

"It's going to take a while before people are convinced that the economy is going to recover," he said. "And that basically things like Iraq, corporate scandals, and the SEC scandals are going to work out."

Still, many analysts stress that the economic recovery, while choppy, continues to plow ahead, enabling the market to move upward.

Stocks also have technical factors in their favor. The market typically sees a year-end rally, since money tends to flow into the markets from dividend and interest payments as well as some year-end bonuses.

"Portfolio managers are nervous they have missed part of this market advance. They had three bad quarters and they feel they need to put their money to work," said Bill Barker, investment strategy consultant at RBC Dain Rauscher in Dallas.

"I don't think the rally will stall unless we get a dramatic shift in economic activity," he said.

For the week, the Dow climbed 73.65, or 0.9 percent, after rising 120.61 yesterday. The Dow closed the week at 8,517.64.

The Nasdaq had a weekly gain of 29.57, or 2.2 percent. Yesterday, the Nasdaq rose 30.95 to 1,360.70.

For the week, the S&P index rose 3.31, or 0.4 percent. Yesterday, the S&P advanced 15.20 to 900.96.

The Russell 2000 index gained 10.81, or 2.9 percent, after rising 9.95 yesterday. The Russell ended the week at 383.45.

The Wilshire 5000 Total Market Index -- an index that measures more than 5,700 U.S.-based companies-- ended the week at 8,502.20, up 51.56 from last week. A year ago, the index was 10,016.81.