NEW YORK – Expect stocks to climb for the third straight week as investors yank cash out of money market accounts and snap up shares on optimism an economic rebound is around the corner.
The best bets? So-called ``cyclical stocks'' that benefit from the beginning of an economic uptick, such as shares of industrial and chemical companies and makers of big-ticket consumer items like cars and refrigerators.
``We are in a cyclical rally that has more room to go,'' said Charles Reinhard, senior U.S. investment strategist at Lehman Brothers.
A slew of company announcements that profits will beat forecasts is driving investor optimism. Profit warnings are down sharply from recent quarters, the latest data show.
``There's been a huge pickup in positive preannouncements. That's good news,'' Reinhard said. ``The average market rebound from a recession is just under 40 percent and we're 20 percent off our Sept. 21 low. It's just beginning.''
Other factors that hearten investors include the slowing pace of job losses and signs the key services sector is growing. In addition, interest rates are so low that money market returns can't keep pace with inflation. That's prompting investors, who have billions of dollars parked in cash accounts, to buy stocks.
``The gains will be sustainable in the short term because the momentum of economic news is one of a rebound in the United States,'' said Gary Dugan, the London-based global market strategist for asset management firm JP Morgan Fleming, which oversees $600 billion. ``It's dangerous not to go with the flow with the amount of cash around.''
To be sure, investors are wary the fourth-quarter earnings season could bring bad news. Corporate profits are still falling and not expected to rise again until at least the second quarter of 2002, according to Thomson Financial/First Call. And it remains difficult for companies to boost earnings by raising prices amid a still-lagging economy.
Amid a relative dearth of economic data or profit reports next week, positive sentiment is expected to pull stocks still higher.
``Clearly there are some worries -- just look at the number of people who have been laid off -- but I still have the sense the bulls will carry next week,'' said Kevin Connellan, head of equity trading for Northern Trust Co. ``Investors are putting the money where their heart is.''
On the calendar next week: A report on producer prices will help investors gauge whether companies have been able to raise prices, and Alcoa Inc.'s (NYSE:AA - news) profit report may give a signal of how the battered manufacturing sector is holding up.
Alcoa is the world's biggest aluminum producer and the first Dow Jones industrial average-listed company to report fourth-quarter profits.
For the week, the Standard & Poor's 500 index rose 0.99 percent, up for the third straight week. The Dow average gained 1.2 percent and the Nasdaq composite index rose 3.6 percent.
PROFIT WARNINGS SLOW
Wall Street will remain on high alert for profit warnings ahead of the official earnings season, which begins mid-January.
So far, the positive tone of profit highlights has lifted investors' spirits and helped prompt the S&P 500's three-week rally.
Of the 1,204 early profit announcements so far, 25 percent have been positive. That's more than the 16 percent average clocked during the same time frame of the first three quarters of 2001, according to Thomson Financial/First Call.
At the same time, the pace of warnings has fallen. About 46 percent of all company preannouncements have been negative, down from 67 percent in the earlier three quarters.
Investors point to massive cash stockpiles that could send stocks higher. Just look at a liquidity gauge called ``money at zero maturity'', or MZM. This measures investments that are easily converted into liquid funds, such as savings accounts and money market funds.
``There's enough cash out there to revive the economy, keep home sales strong and push stock prices higher,'' said Edward Yardeni, chief investment strategist for Deutsche Banc Alex. Brown.'' It's enough to create a whole new bubble if we set our mind to it.''
MZM has surged to $5.6 trillion, said Yardeni. That's up almost $1 trillion in the past year and it now equals about half of the U.S. gross domestic product.
Weekly jobless claims data is expected on Thursday. The weekly number, formerly overlooked by most stock investors, has become important in recent months as Wall Street clamors for any signs of an economic recovery.
Most recently, the number of Americans filing for first-time unemployment benefits rose sharply, to 447,000, in a sign the labor market remains soft. Unemployment figures are closely watched because higher unemployment can hurt consumer spending, which makes up about two-thirds of the nation's economy.
Also scheduled is the producer price index, which signals change in wholesale prices paid for goods including food and lumber.
Wall Street economists surveyed by Reuters expect prices overall slipped by 0.2 percent, following a decline of 0.6 percent in the previous month. Still the core rate, which excludes the volatile food and energy groups, is expected to rise 0.1 percent, after a gain of 0.2 percent.