Upbeat earnings helped the major indices recover a tiny bit of ground Monday, save for the

Dow

, which was waylaid by

3M

(MMM) - Get Report

. But skittishness and lack of buying conviction persisted in a market still shaken by last week's rout and unsure if the worst has yet to come.

Friday's sharp selloff, which established five-month lows for the major indices, is already prompting fresh calls for an oversold bounce to take place. But unlike

previous bullish calls, which have all been premature so far this year, some usually cautious voices have joined the chorus of those who advocate more exposure to equities.

Banc of America's Tom McManus, for one, is raising the stock weighting in his investment portfolio to 60% from 55%, marking the first time the prudent and often accurate strategist has raised his equity allocation in two years.

M&A activity also has some participants hopeful -- Monday's deals included

Adobe

(ADBE) - Get Report

buying

Macromedia

(MACR)

, as well as a merger between videogame makers

GameStop

(GME) - Get Report

and

Electronics Boutique

(ELBO)

.

Investors remained largely unconvinced on Monday. The

Dow Jones Industrial Average

lost 16.26, or 0.16%, to close at 10,071.25. The Dow was weighed down by a 6% decline in the shares of 3M, whose sales outlook for the year was questioned by analysts after the company's first-quarter earnings topped estimates.

Meanwhile, the

S&P 500

rose 3.36, or 0.29%, to 1,145.98. The

Nasdaq Composite

, badly hit Friday after

IBM's

(IBM) - Get Report

disappointing earnings, gained 4.77 points, or 0.25% to 1,912.92 on Monday. The tech-heavy index was aided by

Corning

(GLW) - Get Report

, which lifted its first-quarter earnings guidance, and by analyst upgrades of

Intel

(INTC) - Get Report

and

Applied Materials

(AMAT) - Get Report

.

Breadth was mixed with advancing issues beating decliners 9 to 7 on the

NYSE

but decliners beating advancers 8 to 7 on the Nasdaq. By comparison, declining issues topped advancing ones by nearly 3-to-1 on Friday. Volume was also much lower Monday, with 1.4 billion issues traded on the NYSE and 1.6 billion on the Nasdaq, compared with 2.7 billion and 2.3 billion, respectively, on Friday.

Clearly not a reversal yet. Why should there be one, after all?

Last week raised a number of red flags about slowing economic growth and business spending as well as waning consumer confidence. The rest of this week could again raise the specter of stagflation, with fresh readings on inflation with the March producer price index on Tuesday and the consumer price index on Wednesday. In that context, even the continued slide in crude oil prices, which fell 12 cents to $50.37 Monday, provides little relief.

Certainly, Monday's lack of buying enthusiasm reflects traders' wariness that the market has reached levels from which the market could spur a sustainable comeback. But according to some, those "tradable lows" may be just around the corner.

Don Hays, chief investment officer of Hays Investment Group, says there's a strong chance that this year's lows on the S&P 500 are just three days away. "I wouldn't say there are 100% odds, but a bad CPI might produce the one last good decline" for the S&P this year, he says.

Putting his money where his mouth is, Hays is putting his firm's last 10% in cash back into the market. Four weeks ago, he had already returned 10% cash into the market and predicted that the S&P 500 would top its March highs by mid-April.

While this call has obviously not materialized, Hays says that all of his indicators -- which include a comparison with a similar period of inflation fear in 1994, as well as current market psychology, monetary policy, and economic and technical indications -- now call for lows to be found very soon.

Whether or not Thursday is that day, Banc of America's McManus agrees that the "wall of worry" -- concerns about slowing economic growth, lackluster earnings, and inflation -- may now be strong enough to offer better yields in equities.

Since December 2003, McManus reduced the stock weighting in his firm's portfolio four times, taking it from 75% to 55%. He chose to raise it again to 60% after Friday's rout in the market. "We believe Friday's close is the best opportunity to invest in stocks in at least a year," he wrote to clients.

The move, he says, recognizes an improved risk/reward trade-off. Until recently, stock valuations remained rich and investor caution was still rare. But thanks to earnings disappointments from the likes of IBM, "Now, finally, optimism is giving way to concern that 2005 may have more negative surprises in store," McManus notes.

Among the technical indicators used by BofA was a sharp spike in purchases of put-options on Friday, when 5.5 million contracts -- a new daily record -- traded at the CBOE, as investors scrambled to insure portfolios against downside loss.

While there's renewed caution in the market, McManus thinks that earnings won't plummet and valuations have improved modestly. That leaves room for a bit more exposure to equities.

But put in a broader context, McManus' equity allocation remains below the average equity allocation of Wall Street strategists, which remains at 65%, according to

Bloomberg

. But McManus' forecasts, it should be noted, were among the most accurate ones last year.

To be on the safe side, the strategist also raised his allocation in Treasury Inflation Protected Securities (TIPS) to 15% from 10% previously. He had missed out, he confesses, in the bond rally of the past few weeks.

On Monday, however, the benchmark 10-year Treasury note fell 6/32 and its yield rose to 4.27% after Fed Governor Susan Schmidt Bies played down both inflation and slowdown concerns at a conference. Of course, tomorrow's PPI data may suggest otherwise to a market that's searching for a bottom.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.