Technical rallies bring temporary relief

NEW YORK -- Wall Street types are fond of their obscure jargon. It lends an air of complexity and a sense of mystique to the otherwise mundane ups and downs of the stock markets.

Take the term ''technical rally.'' Some analysts believe that strong gains on the Nasdaq Stock Market last week were the result of a technical rally rather than a fundamental rally.

So what's the difference?

A technical rally is usually caused by one of a handful of buying patterns used by professional traders to reconcile stock portfolios to some earlier short-term market movement.

A fundamental rally, on the other hand, results from a long-term trend, as in the belief that improvements in technology will increase worker productivity and keep companies profitable for the foreseeable future.

That dynamic has fueled the bull market of the past decade.

In the case of this past week's technical rally, however, the short-term movement traders are adjusting to is the massive Nasdaq selloff that occurred in the spring, when investors suddenly soured on technology stocks.

The downturn slashed more than a third of the value off the tech-dominated Nasdaq Composite Index, reducing it from an all-time high of 5,049 in mid-march March to around 3,100 a month later.

But this past week, the Nasdaq climbed back into positive territory for the year, surpassing for the first time since April its 1999 yearend closing figure of 4,069. The index rose 71.32 on Friday to close at 4,246.18, giving it a gain of 222.98 for the week.

When the market drops quickly, as it did last spring, it creates a condition known as an oversold market, explained Ricky Harrington, technical analyst with Wachovia Securities in Charlotte, N.C.

That environment sets the stage for a subsequent technical rally brought on by ''short-term forces of supply and demand,'' Harrington said.

For example, bargain hunters -- to use another bit of Wall Street jargon -- may rush into the market hoping to buy up shares of stocks that were decimated during a selloff.

That period of bargain buying will trigger a rally founded on nothing more than a desire by some market players to purchase stocks on the cheap.

''The buyers have short-term objectives and the rally won't last as long as a fundamental rally. The buyers' actions tend to exaggerate the short-term movements of the market,'' Harrington said.

Several types of professional investors frequently buy and sell based on short-term objectives that can prompt the market in one direction or another. The list includes day traders, hedge fund managers and New York Stock Exchange specialists who maintain orderly markets for Big Board stocks.

Harrington said technical rallies, while usually short lived, sometimes mark the beginning of ''something much more substantial.''

More substantial rallies are also prompted by strong corporate earnings reports, which proved another significant factor in the week's stock market gains.

The technology sector, for example, took off after Internet giant Yahoo! reported better than expected second-quarter earnings.

A day later, Internet software maker Ariba Inc. said its fiscal third-quarter losses would be less than expected. Moreover, Ariba said it expects to show profits within a year, good news for the scores of unprofitable upstart Internet companies written off by investors last spring.

Other causes for optimism stemmed from broader economic factors, including the fact that energy prices appear to have at least temporarily stabilized, as well as a general feeling that the Federal Reserve will leave interest rates alone for the time being.

''There are those who feel the Federal Reserve Board may have done its job -- for now,'' said Alan Ackerman, senior vice president at Fahnestock & Co.

All of this proved little comfort to blue-chip investors, however, as the markets seemed poised to revert to an all-too-familiar pattern in which the Nasdaq rises at the expense of the Dow Jones industrial average.

The benchmark Dow index, still down about 6 percent for the year, registered only minimal gains over the week despite strong earnings reports from such bellwether companies as General Electric and investment bank J.P. Morgan.