Posted on: Thursday, May 17, 2001

Analysts cautious despite Dow's big gain

USA Today

Blue chips blasted through a key psychological barrier yesterday, but analysts cautioned that the true test of a new bull market lies ahead.

The Dow Jones industrials added 343 points to 11,216, the index's first close above the 11,000 mark in eight months. The Dow, up 4 percent for the year, is the only major index to have notched a decent gain since the Federal Reserve starting cutting interest rates Jan. 3.

Compare that with the comatose Nasdaq composite, which gained 81 points to 2,166 yesterday but is still down 12 percent this year.

Broader stocks haven't responded much, either: The Standard & Poor's 500 index remains down 3 percent this year despite yesterday's 36-point gain to 1,285.

So why is the Dow leaving other broader indexes behind? "Investor preference remains with stocks with perceived safety," says Gordon Fines, portfolio manager with American Express New Dimensions fund.

Although finally breaking through 11,000 again might be encouraging, analysts caution not to attach too much significance to it.

While yesterday's gains are impressive, the real test of the rally's strength comes today and tomorrow, said Larry Wachtel, a market analyst at Prudential Securities Inc. in New York.

"We have seen these one-day wonders many times over the past few months," Wachtel said. "These types of moon shots tend to morph into declines. If this is the real thing, it will have to come in the followthrough."

The Dow peaked at 11,722.98 on Jan. 14, 2000.

"A new all-time high is more important than Dow 11,000," said Mark Minervini, president of Quantech Research. "A new record would be a special number that would say: "We are in a new bull market.'"

Still, there are reasons to justify some bullishness:

• While the Nasdaq and its tech stocks are lagging this year, the Dow would not be where it is without the help of some high-profile tech stocks. Shares of Hewlett-Packard, Intel, IBM, Microsoft and Motorola still account for 25 percent of the Dow's market value. And so far this year, Microsoft and IBM are the Dow's top percentage gainers.

• Skeptics who have grown comfortable betting against the market might wonder if momentum has turned now that the Dow has surged through 11,000. The Dow had breached but failed to close above 11,000 eight times since November, says Gibbons Burke of MarketHistory.com.

But the most powerful thing weighing in favor of stocks is the five interest rate cuts by the Federal Reserve, says Jim Stack of InvesTech. "This is the most bullish monetary policy we've seen in a decade," he says.

With the Fed expected to keep cutting rates, "There's no reason not to be bullish for the long term," says Duncan Richardson, portfolio manager at Eaton Vance.

Traders still caution against seeing dollar signs in Dow 11,000 because there are surely more earnings warnings to come. Says Mike Clark at Credit Suisse First Boston: "Are we entering into a new bull leg? No."

Advancing issues outnumbered decliners 2 to 1 on the New York Stock Exchange, where consolidated volume came to 1.64 billion shares, up from 1.28 billion on Tuesday.

The Russell 2000 index, the barometer of smaller companies, advanced 7.58 to 497.21.

Overseas markets were mixed. Japan's Nikkei stock average fell 2.6 percent, and France's CAC-40 slipped 0.4 percent. But Germany's DAX index advanced 1.3 percent, and Britain's FT-SE 100 rose 0.7 percent.