Farrell: Friday Thoughts

The level of hesitancy in the market is so palpable you can almost taste it.

Volume has dried up from even the last few months tepid pace. It seems that investors are waiting for someone else to jump in and make the first move. Volume has averaged 1.5 billion shares a day on the NYSE for the past 50 sessions or so, and we are now well below that for the most recent day's trading. When volume turns down and the market churns around a level it usually means a breakout is coming one way or the other. Our feeling is that the next move will be down. Very strong rallies like we have seen since the March lows are usually corrected by 1/3 to 1/2 of the advance and that would be a positive move for the longer term health of the market.

Recent economic data point to a continued slow turn in the economy. The news hasn't turned positive yet but the pace of the decline has decidedly slowed. Jobless claims have leveled, last week's Philadelphia Indexwas still negative but barely so, and inflation seems well contained. Interest rates have backed up and commodity prices have calmed down which indicates the market has less fear about near-term inflation. With unemployment high and still rising, capacity utilization at record lows, the savings rate rising rapidly (now at 5.7% and our guess is that it goes toward 9%), and Treasury financing needs at staggering levels we find it hard to see a catalyst for higher stock prices in the near term. But we emphasize that is a very short-term outlook.

Numerous stocks are attractively valued and we would not hesitate to stock pick and let the market find its appropriate level. Names we have mentioned in the past two weeks include Comerica, BB&T Bankand JoAnn Stores. We continue to like the large cap tech group, and there are now 28 companies in the S&P 100 that have raised their dividend in the last six months.