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(March 8, 2002) STOCK INDICES: 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 Stock Market up as investors worry they'll miss out on the rally.

The S&P 500 has gained 3 percent in the past week as evidence mounted for an economic rebound. 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.

The rush of solid data is expected to continue next week. 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.

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. 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. That suggests share prices reflect much of the projected rebound in earnings.

Longer term is not so rosy. January 2002 was the warmest in the US for 123 years, according to the National Oceanic and Atmospheric Administration, and there are clear suggestions in the data for that month that the warmer weather prompted consumers to spend rather than sit indoors. Unseasonably warm weather leads to big upswings in the adjusted data even though the underlying numbers may still be falling. But it may not be sunshine ahead for the economy, according to the NOAA's sunspot cycle predictions.

Sunspots - flare-ups on the surface of the sun, which can raise the temperature on Earth - occur in regular 11-year cycles and the last peaked in 2000, indicating potentially cooler temperatures ahead.

Moreover, the NOAA and other weather-watching organizations have warned another El Nino effect could develop this year. The last one in 1997 was estimated to have caused about $34bn worth of damage.

El Nino involves generally warmer weather, increasing the likelihood of flooding across South America, and drier conditions in the Western Pacific, often associated with bush fires in Australia.

Economic activity may be turning up, but tail winds from the weather are likely to turn into headwinds.

If the S&P 500 breaks the 1,180 resistance, the uptrend could follow. Go long on a pullback to 1,150.

Jean-Jacques Chenier

www.alterama.com

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