WALL STREET Market heats up, but investors remain cautious

The Dow is up 21 percent since early October.
LOS ANGELES TIMES
The stock market is on a hot streak, and technology issues are leading the charge.
Of course, investors have heard that come-on before, and for the past two and a half years it has been to their peril to believe that any rebound -- especially in the technology sector -- would be more than transitory.
That's why suspicions are running high with Wall Street again in recovery mode, even though some market bulls say their reasons for optimism are as solid as they've been in a long time.
The Dow Jones industrial average closed out Friday up for the seventh straight week, the longest winning streak since 1998. The tech-dominated NASDAQ composite index ended at 1,468.74 on Friday, its highest close since June 19.
Since reaching five-year lows in early October, the Dow is up 20.8 percent, to 8,804.84, and the NASDAQ index is up 31.8 percent.
The last rally of this magnitude occurred in the fourth quarter of 2001, as the market rebounded from the selloff that followed the Sept. 11 terrorist attacks.
Tech stocks led
Then, as now, battered tech stocks led the way. The NASDAQ 100 index, which comprises the most prominent NASDAQ tech firms, has risen 38.7 percent from its October low.
Last year's fourth-quarter rally lasted until the first week of January. The market then struggled through the winter before plunging anew in spring and summer amid a wave of corporate financial scandals.
"There appears to be a fairly common assumption among market followers that the rebound in prices since the lows of October is merely a 'bear-market rally,"' said Richard McCabe, chief market analyst at Merrill Lynch & amp; Co. in New York.
Small investors seem particularly wary. Despite the heady gains of the major market indexes since early October, stock mutual funds have taken in relatively little in new cash in the past four weeks, according to AMG Data Services.
A high level of skepticism can be a good thing for Wall Street: It often means there still is plenty of money on the sidelines, waiting to be lured into a continuing rally.
Fear diminishes
Other trends also point to a relaxation of the fear level in the market. Yields on corporate "junk" bonds have tumbled as some investors have rushed back into those securities. The yield on an index of 100 junk issues tracked by KDP Investment Advisors fell to 10.53 percent on Friday. (As the yield of a bond falls, its price rises.)
Investors' renewed interest in junk bonds suggests growing faith that the economy will continue to improve in 2003, and thus that there is less risk of debt-heavy companies being unable to pay their bills.
For stocks and junk bonds, a central question is whether the economy will be OK in 2003.
On that front, some reports last week indicated the outlook is improving. The Conference Board said its index of leading economic indicators stabilized in October, halting a four-month slide. And the government said weekly claims for jobless benefits hit a four-month low.
Big investors who have been putting cash to work in stocks say that even if the economic outlook remains murky, the market's mood has rightly improved since early October. "The market was priced for Armageddon, and that's just not the scenario," said Jack Ablin, chief investment officer at Harris Trust in Chicago.
As was the case a year ago, the current rally also has the calendar on its side. The November-to-January stretch has historically been the stock market's strongest period of the year.
The key differences between now and a year ago or two years ago, bulls say, is that share prices are substantially lower, and so are most interest rates. In addition, with Republicans in control of Congress, investors are expecting new tax cuts for businesses and consumers in 2003.
Those factors should keep this rally from abruptly reversing, optimists say.
What's more, many Wall Street pros say, financial and accounting scandals have become old stories, and investors are figuring that the worst of the bad news on that front has passed.