Upgrade portfolios during periods of market weakness

Equities started the week on strong footing on Monday helping to recoup some of the losses posted last week. Slightly lower crude oil prices and better-than-expected earnings results from several key companies helped drive today's market gains, in my opinion. Light volumes also added to today's volatility, in my view.

For the trading session, the blue-chip Dow Jones Industrial Average increased 130.43 points, or 1.02 percent, to 12,876.31. The broad-based S&P 500 rose 15.30 points, or 1.10 percent, closing at 1,403.58. The technology-laden Nasdaq Composite was also strong, gaining 42.97 points, or 1.76 percent, to close at 2,488.49.

Last week's rally was relatively broad-based, with nine out of 10 S&P 500 sectors finishing the session in positive territory. Consumer Discretionary stocks posted the biggest gains, while Energy was the only sector to finish the day in negative territory.

I believe the rally was primarily driven by improved investor sentiment due to lower crude oil prices, positive earnings reports from several major companies, and news reports about merger and acquisition activity in the technology sector. Crude oil prices closed at just above $124 per barrel, down from highs reached at the end of last week. In general, trading volumes during this session were light, which I believe casts doubt on the conviction behind the upward move.

We believe persistent problems in the housing and credit markets and their potential impact on U.S. economic growth will continue to cause volatility in the equity markets over the near term. We note that many of the issues plaguing risky assets at present may take some time to work their way through the system. Longer term, however, we believe the equity market is reasonably well positioned to contend with these concerns; we point to attractive valuations, solid corporate balance sheets (excluding financials), and strong free cash flow generation as drivers for equities going forward.

Indeed, a number of the firm's proprietary valuation and sentiment indicators point to higher equity markets by the end of 2008, although our generally positive outlook is predicated upon successful policy implementation by the Federal Reserve and others. Risks to a sustained market rally include a continued deterioration in credit markets, persistently high oil prices, and meaningfully slower global economic growth. Given our longer-term positive view, we would use periods of market weakness to upgrade portfolios and build positions in high-quality companies that generate strong free cash flow and possess above-average prospects for growth.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial services firm serving Northern Nevada at 6005 Plumas Street, Ste. 200 Reno, NV 89509.