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(March 1, 2002) STOCK INDICES: Stock Markets rallied after a report showed manufacturing expanded for the first time in a year and a half. The S&P 500 rose 25.05, or 2.3 percent, to 1131.78. The Nasdaq Composite Index rallied 71.25, or 4.1 percent, to 1802.74. The Dow Jones Industrial Average jumped 262.73, or 2.6 percent, to 10,368.86. For the week, the S&P 500 surged 3.9 percent, the biggest gain since the week ended Sept. 28. The Dow climbed 4 percent while the Nasdaq advanced 4.5 percent, its first weekly gain in five.

Government reports on factory activity, personal spending, durable-goods orders and economic growth, combined with comments from Federal Reserve Chairman Alan Greenspan, shored up confidence the rebound will revive profit growth.

However, benchmark indexes already reflect an economic rebound. S&P 500 stocks trade for an average 21.3 times expected earnings, up from 17.6 on Sept. 21, when the index fell to a three-year low. Wariness about the extent of creative accounting methods will continue to vex the market, particularly in the tech sector, keeping the bulls on a short leash. You have to differentiate between the markets and the economy. The economy has turned, but the market is grappling with the psychological problem of the aggressive accounting by some tech companies.

Consumers -- whose spending has single-handedly kept the economy from falling into a deeper hole, thanks to the lowest interest rates in four decades -- are now up to their eyeballs in debt and just a step away from living beyond their means. The housing market has risen so much that it appears unlikely it will have room left to grow at the same brisk pace.

While businesses have cut deeply into their inventory of unsold goods, is it realistic to think capital spending -- the stuff that moves the economy and pulled it into recession in the first place -- will return to its powerful self? Talk of a full-blown recovery is meaningless until the source of the malaise -- corporate America, which accounts for one-third of growth -- starts investing again in the economy. Right now, the trend among businesses is to let inventories run down while they hold back on new production. They are looking for clear signals that consumption is rebounding.

For the stock market, it will mean a longer wait for corporate earnings to improve.

We took profits on the March NASDAQ 100 (ND02H) short position BUT did not go long (please, visit our archives www.alterama.com.). Now, let's go short the March S&P500 with a stop above 1,140. The market is overbought in a long term down trend.

Jean-Jacques Chenier

www.alterama.com

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