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Are stocks now climbing too high?

Posted: Friday, May 16, 2003

NEW YORK (AP) Did we hear worries about too much buying being muttered on Wall Street this past week? We haven't heard that kind of talk in a long while.

Given the stunning strength in stocks in recent weeks, it's not surprising that some Wall Street strategists are starting to think the market has come too far too fast and it might be time for a bit of a pullback.

That's not to say stocks will sink back to their bear market lows, but they might not be heading only straight up.

''We are not going to have a V-shaped recovery because the fundamentals just don't back it up,'' said Brian G. Belski, fundamental market strategist at US Bancorp Piper Jaffray.

The market's recent performance is impressive. Now that the war in Iraq is largely a distant memory in investors' minds, they seem more ready to commit to stocks.

Just look at the climb since March 11, when the market's major indexes were at their lowest levels since hitting multiyear lows in October. The Dow Jones industrial average has gained about 16 percent since then, the Nasdaq composite index 22 percent and the Standard & Poor's 500 index about 18 percent.

And the surge has been broad-based, with sectors from technology to blue chips to consumer stocks joining in the gains.

Still, the worry is that the market is outrunning reality. Maybe not irrational exuberance, but maybe overexuberance.

There aren't any signs of a strong economic rebound, and especially troubling has been the continued weakness in the labor market.

Quarterly corporate earnings came in better than expected, but estimates had been drastically reduced. And expectations for the second half of this year may be far too high given that the economy remains sluggish.

There are also concerns that stocks have accomplished a year's worth of positive returns in a few weeks' time.

''I think the bear market is over and 2003 will turn out to be a better year for stocks,'' said Francois Trahan, chief investment strategist at Bear, Stearns & Co. ''But what I am wondering is if the market is getting ahead of itself.''

Trahan points to technical indicators. For instance, the Market Volatility Index (VIX) of the Chicago Board Options Exchange now stands at about 21 to 22, which is above the 20 range that has stopped most rallies over the last six years. The higher the VIX, the more fearful investors are.

He also worries about how upbeat investors are. Using an average of four prominent weekly investor sentiment polls, he sees 49.7 percent of investors as bullish and that's growing each day. Usually when that average hits 55 percent, he says, it is the ''trigger point for a reversal.''

Trahan's expectations for a market pullback which he says could be as much as half the gains in recent weeks spurred him this past week to reduce his recommended allocation of stocks to 60 percent from 65 percent. He also increased his recommendation for what investors should have in cash to 15 percent from 10 percent.

Others, though, aren't so convinced a steep decline is in store. They think there could be some brief profit-taking and then stocks will resume their climb.

They point to the significant price surge that followed the last multiyear bear market from 1973 to 1974. In 1975, the Dow gained 38.3 percent, followed by a gain of 17.9 in 1976, according to the Stock Trader's Almanac.

In addition, this is the third year of the Bush presidency, and there hasn't been a decline in the Dow during a president's third year since Franklin D. Roosevelt was in office in 1939, the Almanac said.

But even those who are more optimistic acknowledge volatility is possible.

Kevin Gaughan, portfolio manager and equity strategist at Strong Financial Corp. in Milwaukee, said investors need to remain smart in their buying and selling.

''It's not just how well you buy companies, it is how well you get out,'' he said. ''You have to have an exit strategy.''

Regardless of where the market turns next, what's worrying Wall Street seems to have changed. It's been a while since the market was considered overbought.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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