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Analysts’ data a useful tool for investors

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Technical analysis is to fundamental analysis what Ludwig van Beethoven is to Britney Spears.

He is complex, sophisticated and often misunderstood by the masses. She is wildly popular, here today and maybe gone tomorrow.

Technical analysts are the deep thinkers of Wall Street who compose their investment music from charts and computers as they direct us to where overall stock prices may be headed. They massage mathematical equations, chart patterns and historical data to produce market prognostications. They talk of stocks "breaking resistance."

Fundamental analysts, on the other hand, make up a trendy group focusing on news of the moment, immediate impact on stocks and the condition of companies. They consider technical analysts irrelevant theorists with their heads in the clouds.

Technical analysts did a superb job of calling the market in the second quarter, predicting it would hit a bottom in April. I personally believe individual investors shouldn't get involved in market timing, and technical analysis tends to foster it. Nonetheless, this research is a helpful tool to weigh against other advice.

"We're more popular in bear markets, because fundamentals don't work then, so we step to center stage to help explain human behavior and some of the quantitative elements," said Jeffrey deGraaf, chief technical analyst with Lehman Brothers. "The best thing investors can do is recognize the trend, get on board, stay with it as long as it's positive and get out when it turns negative."

In his opinion, the biggest mistake an investor can make is to "try to be a hero" based on fundamentals. For example, some investors considered Lucent Technologies really cheap at $20 a share just because it was once $84. Its downward movement would actually take it all the way to $5.

"Investors would rather see a less emotional technical analyst make a decision on the market for them, rather depend on a broker salesman or investment adviser with his own particular interests," believes Jack Hutson, publisher of Technical Analysis of Stocks & Commodities, who has seen the field grow dramatically since the magazine was launched in 1982.

"Technical analysis is a timing tool best used when you're getting into or out of the markets because it tells you to buy now or sell now."

While the fundamental analyst makes a move based on a specific news event, the technical analyst believes all news shows up in the prices being studied anyway.

"Technical analysts haven't just done well calling the last quarter, but have been calling the bull market," asserted Louise Yamada, managing director and head of technical research for Salomon Smith Barney. "Technical analysis is the study of supply and demand in the marketplace, which is important to understand since so many people mock technical analysis."

Volume is the weapon of the bull, Yamada believes, because neither the market nor stocks can be propelled higher without it. When extraordinary volume fails to push a market or a stock higher, it's evidence someone is selling into those rallies. Determining where big institutional money is going, so you can follow, is a big part of the job.

Her current concerns about the stock market include the strong dollar that's making it difficult for multinational corporations; the flight to safety in bonds; oil prices staying high; and the breakdown in global markets. She stresses selectivity and stock groups such as electric utilities, aluminum, cement and smaller-name financials.

A summer rally shows up in one technical analyst's set of numbers.

"I look at the market upturn since the early April lows as a two-stage rally, with the first step in April and May, and the second step starting in mid- or late July and carrying into very late summer, if not the fall," predicted Richard McCabe, chief market analyst with Merrill Lynch. "It could get the Dow Jones industrial average up to 11,500 to 12,000, putting it back around the all-time high made in January of last year and maybe even hitting a new high."

The NASDAQ, despite recent setbacks in technology stocks, could have another good rally phase this summer, getting up to around 2,600 to 2,800, he expects. There will be more downside testing in the fall, though not as vicious as in the first quarter.

Today's market consists of two separate categories: technology and everything else. Tech may do well temporarily before giving back gains in the fall, McCabe predicts, while the majority of stocks have already started a new long-term bull market cycle. They'll have a pullback, but they're still in an emerging upward trend.

But deGraaf remains defensive in what he considers to be a late market cycle, which means investing in stocks such as Waste Management (WMI), Mirant (MIR), Bed Bath & Beyond (BBBY) and Washington Mutual (WM).

"We've got a continuation of the overall market down trend, even though the good news is that the fiscal and monetary stimulus will help ease the downward pressure," deGraaf concluded. "The market will end up weaker in the fourth quarter when the news will probably come out that the domestic and world economies are in worse shape than people realize now."

Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," 98 Henry St., Dept. 183, Brooklyn, NY 11201, or by e-mail at successinv@aol.com.