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Forget the Fundamentals: Charts Say There's More Room to Rise

Investor sentiment is improving, even though the economic outlook and earnings forecasts aren't.

Imagining a world in which the terrorist attacks of Sept. 11 never happened is next to impossible, but stock investors appear to be getting close to pulling it off.

Confounding all but the rosiest forecasts, the major averages have stormed back from the depths to which they descended after terrorists destroyed the World Trade Center's twin towers and severely damaged a section of the Pentagon. Measures of U.S. equities closed Wednesday near their Sept. 10 levels and continued building on those gains

through midday. Meanwhile, shares of economically sensitive homebuilders, retailers and manufacturers advanced Wednesday, despite concerns that the U.S. consumer is beginning an austerity drive.

The question is whether the recent optimism can take the averages higher than they were before any of this began. Economists say it's hard to see how anything can be said to be better than it was prior to the attacks. To technical analysts, who see a kind of collective investor unconscious in chart patterns, the psychology that led the

Dow Jones Industrial Average

to lose 14% of its value in the five sessions after reopening is starting to loom large on their screens.

"People are taking the viewpoint that we're going to have good news," said Robert Harrington, chief technical analyst at Wachovia Securities. "But I still think we run the risk of a much weaker economy over the coming months. This rally is very much technical in nature as the risk of a slower economy is still very great."

A Month of Recovery

On Wednesday, the Dow closed at 9240.86, just 3.8% off its close on Sept 10. The


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ended the day at 1626.26, down 4% from the day before the attack, while the

S&P 500

closed at 1080.99, about 1% off its close a month ago.

Significantly, the climb back from the depths hasn't been accompanied by any particularly hardy economic news, an obviously winnable war or any meaningful improvement in corporate earnings. But where once the steadily imploding economy and markets were creating a sense of doom on Main Street and Wall Street alike, the tenor of the national discourse is now one of optimism.

The media have been talking up the proposed stimulus package from the government and the monetary effects of lower interest rates, offering reasons for people to believe that the economy will "come roaring back," Harrington said. Moreover, he said, the sharp selloff following Sept. 11 created an oversold condition in the market, and many short-sellers -- investors who are betting prices will decline -- have been forced to cover their positions.

"It's more of a technical rally than something fundamental occurring here," said Harrington, noting the uncertainty of earnings season and the uncertain outcome of the war against terrorism in Afghanistan. He estimated the Dow will remain in a range of 8,600 to 9,500, but conceded that there's also "much room for surprise."

"It's interesting that we're near

preattack levels, but it's not as significant as other levels on the charts," said Mike Hurley, technical analyst at Wit SoundView. "Formidable resistance" levels that would ensure the staying power of the rally would be 10,200 on the Dow, 1,900 on the Nasdaq and roughly 1,160 on the S&P 500, levels where the three major averages broke down in August prior to the attacks.

Nevertheless, a strong close Thursday would be a bullish sign, Hurley said.

Some are willing to bet more aggressively on the market's prescience. "Remember, the equity market does lead the economy and has a predictable lead time," said Brian Jones, economist at Salomon Brothers. While tomorrow's retail sales report for September should be weak, as expected, Jones said the number will be close to August's levels and consistent with real consumer-spending growth of 2.5%.