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Steady S&P 500 Gain Ignites Hope

Markets: As the index approaches its record high, Nasdaq moves back into positive territory for the year.


It hasn't been flashy, but a monthlong stock-market advance has pushed the Standard & Poor's 500 to a near record and spurred hopes that a slowly broadening rally will last beyond Labor Day.

Led by medical, financial and energy stocks, the S&P 500 is less than 1% away from its March 24 high, while so-called mid-cap stocks move steadily higher after having climbed into record territory earlier this month.

The pattern of solid, if unspectacular, gains continued Monday as the Dow Jones industrial average climbed 60.21 points, or 0.5%, to 11,252.84, and the S&P added 7.63 points, or 0.5%, to 1,514.09.

The Nasdaq composite index, meanwhile, bounced back into positive ground for the year--though by less than a tenth of a percentage point--by picking up 27.91 points, or 0.7%, to 4,070.59.

To be sure, the latest rally has come amid the languid volume of August when experts caution against reading too much into market trends. The 1.4 billion shares changing hands on Nasdaq on Monday were notably below their daily trading average earlier this year.

Also, some on Wall Street are less than encouraged by recent buying trends despite the gains of the major averages. There are few discernible patterns in the market, and there doesn't appear to be much conviction attached to the buying, they say.

Intel, for example, hit a record high last week, but that hasn't spread to the rest of the semiconductor sector, which remains off its record peak in March.

Investors are buying Intel because "they know if they're wrong and the market goes down, it's easy to get out of Intel, and if the market goes up Intel will lead the way," said Brian Belski, strategist at U.S. Bancorp Piper Jaffray.

Nevertheless, the market has several positives at the moment, said Jim Paulsen, chief investment officer of Wells Capital Management.

Despite a bounce Monday, bond yields have fallen about a full percentage point since mid-January. Second, though the S&P is near its March peak, two quarters of good earnings reports since then have served to lower price/earnings ratios. Finally, market breadth--the number of stocks rising versus those falling each day, has improved moderately.

At the moment, optimism about a so-called soft landing in the economy is pacing the market advance, Paulsen said. But he worries that a slowing economy could start to show up in third- and fourth-quarter earnings and raise the specter of a recession.

"Up till now, bad [economic] news has been good news," Paulsen said. "At some point, bad news will be bad news."

Belski believes that profits will be strong and that the market should rally nicely in the fourth quarter. But the ride won't be smooth. He worries that too many investors expect the market to be strong in the fourth quarter, as it was each of the past two years. Such complacency could mean trouble, he said.

"We're going to have a very good fourth quarter, [but] I think there's a curveball [coming]," he said. "I don't know when or where but I think there's a curveball there."

On Monday, bond yields rose as analysts said government debt prices have become expensive after a 3 1/2-month rally. The 30-year yield rose to 5.72% from 5.67% on Friday.

Among the equity highlights:

* Yahoo tumbled $12.19 to $122.06 after Lehman Bros. analyst Holly Becker said prospects for the largest Internet search company continue to worsen as traditional advertisers have yet to embrace the online venue. Becker kept her "neutral" rating on the stock.

BMC Software rose $2.69 to $28.44 after Merrill Lynch analyst Christopher Shilakes said the maker of software to speed corporate databases "is six to nine months away from rebuilding sales momentum" amid a restructuring.

Comverse Technology jumped $3.81 to $90.44. The seller of telephone-messaging systems is scheduled to report fiscal second- quarter earnings today after exchanges close, and Goldman Sachs analyst Elan Zivotofsky said it is likely to beat forecasts for both revenues and profits.

Elsewhere in the tech sector, Oracle climbed $2.13 to $86.75 and Sun Microsystems advanced $3.06 to $127.81.

* Financial stocks were among the biggest contributors to the S&P 500's advance as investors bet they will benefit from stable interest rates. American Express rose $3.31 to 59.88, Citigroup gained $1.92 to $58.88 and insurer American International Group advanced $2.06 to $86.63.

* Coca-Cola rose $1 to $57 and Coca-Cola Enterprises, its primary bottler, gained $1 to $20.06 after Banc of America Securities analyst Scott Wilkins said Coca-Cola would meet sales volume forecasts in the second half of the year. Coke slid 3% on Friday after Salomon Smith Barney forecast sluggish third- and fourth-quarter sales.

* SkyWest fell $2.75 to $47.25. The regional airline company, which operates under the Delta Connection and United Express names, said it will sell 2.6 million shares at $44.50 a share in a secondary offering.

UAL rose $1.13 to $51.50 as its United Airlines unit and United's pilots union tentatively agreed on a contract.


Market Roundup, C13-14


The Nasdaq Dance

Technology stocks, as measured by the Nasdaq composite index, have blasted off in October each of the last two years after slumping in late summer. But can investors count on another big rally this year?

Source: Bloomberg News

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