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Can Market Sustain Gains?

The dust has settled on Wall Street after the second 400-plus gain for the Dow in less than a week, and it seems apparent investors are feeling more confident about buying stocks – for now.

But analysts are cautious, not saying whether they think Wall Street's recent bursts of buying — resulting in gains of 447 points for the Dow on Monday and 488 points last Wednesday — mean the market has shaken off earnings and accounting worries altogether and found a new upward path.

"We have to see this consistently. Not up 400 points, but up," said Stephen Carl, principal and head of equity trading at The Williams Capital Group in New York.

Portfolio manager John C. Forelli was pleased by the big advances, but guarded about the market's long-term prospects.

"It is hard for me to feel as though there are going to be huge inflows into the equity market," said Forelli, who works for Independence Investment LLC in Boston.

For now, lower prices following 10 weeks of heavy selling deserve much of the credit for the market's strides, analysts say.

"It feels to me like there is a technical bounce going on in the market. The market is severely oversold," Forelli said. "Investors are just realizing that the market looks pretty cheap today."

Analysts also warn that an advance fueled largely by price can last only so long.

"We have been putting money back into the market. But now that the market is up (1,000) points from the bottom, I think people need to be careful of what they are buying," said Susan L. Malley, chief investment officer for Malley Associates Capital Management in New York.

Since last Tuesday, when the Dow closed at a four-year low of 7,702.34, the blue chip index has regained 1,009 points. And, it has recouped 38 percent of the 2,650.74 it had lost since May 17, the last time all three major indexes had a weekly advance.

Market observers are concerned that the rebounds have caused stocks to go from cheap to expensive too quickly. That means stocks, which have been vulnerable to profit-taking for some time, are likely to give back gains.

"It has been a trading market, and it will probably still be a trading market. It won't be straight up. We're still going to have lots of bumps," Malley said. "You have to be pretty quick to take your gains, and not assume the market is going to go straight up."

For the market to really move higher, it must get past the issues that have weighed down stock prices for 2½ months, sending them falling to four- and five-year lows. Earnings outlooks must markedly improve and corporate accounting must become more reliable.

Analysts were encouraged Monday by the market's ability to rally despite the latest report of accounting problems, this time at Qwest Communications, which said it was restating results for 2000 and 2001.

But for the market to sustain an advance, analysts say bookkeeping scandals must stop and companies must face stiff punishments for wrongdoing.

Events last week, namely the arrest of Adelphia executives on Wednesday for allegedly stealing from the company, soothed worried investors' and helped the market start its recovery a lot of its steep decline. The market also got a boost from House and Senate negotiators agreeing to legislation that would create tougher punishments for fraudulent accounting.

"The credibility building is going to be a long and slow process," Forelli said. "We are not looking at a rapid rebound like this every day."