Cinco de Mayo!

Monday, May 05, 2003 | 10:50 AM

The 5th day of the 5th month gives us an excuse to look at 5 key issues confronting the market over the next 5 months:

1) Earnings are much better than expected; Although its widely acknowledged that the bar has been dramatically lowered, the psychological impact of beating instead of missing. It produces a very positive impact on sentiment, and that cannot be underestimated. Still, the key will be how company’s report in the October Q – after the war has become ancient history, and far enough forward to see of a 2nd half recovery is the real deal or not.

2) The Economy continues to be sluggish, with occasional signs of not getting worse. The War seems to have givewn the Economy a pass, at least for now, and at least as reflected in the Market. It’s worth noting that economy often looks the worse at the bottom, and things are looking, well, less bad than a few months ago. The key question remains whether the economy is expanding, contracting, or merely marking time.

3) Speculation has returned to the market; If not quite with a vengeance, well, at least as quite a force. Last week, e.g., (PCLN) was up 30% in a day as the result of a reverse stock split. While many of the beaten down telecom and tech stocks are still decent value plays, we must respect what excess speculation potentially means to the longer term health of the market. Do not confuse aspects of speculation with NASDAQ’s leadership; No rally is sustainable without some Generals leading the charge, and for now, its tech and financials.

4) Resistance (as shown on the Nasdaq chart at right) is a short distance away near ~1600. The Comp has had a huge run off of the recent March 12 reversal, rallying 20% from 1253 to over 1500 in 6 weeks. That fast move suggests a somewhat overbought condition, which may take some backing and filling to alleviate.

5) Valuation is still a big issue going forward. The S&P500 P/E is 32.4, which is unusually pricey. Perhaps it can be justified if there is a very hefty spike in earnings – a distinct possibility given the lean, mean condition companies find themselves in during this earnings trough. Any revenue increase would in fact have meaningful impacts on earnings; That could make high P/E stocks look very cheap very quickly.

These 5 issues are worth watching as we move into the usually quiet Summer period.

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Quote: “To fail is a natural consequence of trying, To succeed takes time and prolonged effort in the face of unfriendly odds. To think it will be any other way, no matter what you do, is to invite yourself to be hurt and to limit your enthusiasm for trying again.” - David Viscott

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