Market Watch : Critical 2 Weeks for Rally

The stock market’s surprising rally looks like it has enough ammo to last at least another two weeks. But whether the rally broadens significantly in that period could dictate the next big move, up or down.

Here’s what’s happening: The Dow Jones industrial average has risen 177 points since Feb. 23. And 45.50 of those points came Friday, when the Dow jumped to 2,741.22. But Friday’s rally was skewed by two factors: the “triple witching” quarterly expiration of stock index options and futures contracts, which caused artificial buying to close out contract bets, and short covering--buying by traders who had sold stock short, wrongly betting that prices would fall.

What’s still lacking in this rally is breadth. Buying has been concentrated in high-tech stocks and big industrial stocks. Overall, not enough stocks are rising to indicate broad investor interest. Friday, for example, only 884 New York Stock Exchange issues rose; 591 dropped. Those are lousy numbers for a 45-point Dow rise.

Marc Pado, a technical analyst for Jefferies & Co. in Chicago, worries that when the short sellers finish buying to close out their losing bets, there won’t be enough real buying to support prices, and the market will retrench.

But some analysts see early signs of widening investor interest in stocks. Larry Rice, manager of national over-the-counter stock trading for Wedbush Morgan Securities in Los Angeles, sees “some of the lower-capitalization (small) stocks getting some attention,” though he said it’s tentative. Buyers of these stocks, many in the $1 to $5 range, are individual investors.

What’s more, said Jerome Hinkle, a trader at Sanford C. Bernstein & Co. in New York, there “still are a lot of major companies buying back their own stock,” most likely in an effort to boost per-share earnings in a difficult environment.

If more individuals and companies enter the market in the next two weeks, they will compound what could be significant buying by money managers. The latter will be “window dressing” portfolios before the quarter ends March 31. By this last-minute buying, money managers try to make sure the portfolio’s quarterly report to clients includes some recently hot stocks.

Another reason that buying could be strong between now and March 31: Money managers who have built up cash risk looking silly to clients, given the rally.

So the stage is set for the market to go higher short term. But after March 31, the warning remains: Unless the buying broadens, the bears could be back in control again soon, many analysts say.

LEADERS AND LAGGARDS

The five Dow 30 stocks up the most since this rally began in late February, and the five biggest laggards.

Stock Feb. 23 Friday Chg. Navistar $3 5/8 $4 3/8 +20.7% Boeing 60 69 3/4 +16.3% Goodyear 33 37 1/2 +13.6% United Tech. 49 1/2 56 +13.1% Beth. Steel 17 5/8 19 3/4 +12.1% Dow average 2,564 2,741 +6.9% Philip Morris 37 1/2 38 5/8 +3.0% USX 35 3/8 36 1/8 +2.1% Amer. Express 28 28 3/8 +1.3% Exxon 47 1/8 47 1/2 +0.8% Union Carbide 23 1/4 22 1/8 -4.8%

Muni Bond Shock: If you own old, high-yielding municipal bonds, be prepared: You may have to give them up early.

Most muni bonds are issued for 20- or 30-year terms, but they become “callable” after 10 years, notes John Jamieson, head of the muni bond unit at Massachusetts Financial Services in Boston.

In the early 1980s, states and municipalities that issued bonds were forced to pay extraordinarily high yields, as interest rates stayed high. Now, rates are much lower and the first of those high-yield muni bonds are reaching their call dates.

It’s certain that many of those bonds will be paid off early, as issuers seek to cut their interest bills. One measure of call expectations: “Advance refunding,” whereby an issuer sets cash aside to pay off its bonds as soon as the call date arrives. About $160 billion worth of tax-exempt bonds issued from 1980 to 1985 have had such money set aside, according to Goldman, Sachs & Co.

Bond calls will be most devastating for investors who purchased individual muni bonds or bond unit trusts and who counted on that high income lasting 20 or 30 years. Say you have a 1981 bond paying 11.4%. If it’s retired, and you want to put the money back into new muni bonds, you’ll face average yields of 7.3% now.

If you own individual bonds or unit trusts (shares in bundles of bonds), check soon on the call provisions so you can be prepared. If you own muni bond mutual funds, no doubt the fund manager already is trying to figure out how to combat the problem.

Jamieson said MFS’ muni bond funds are trading some of their callable older bonds now, to lock in rates on new bonds. That will cut the funds’ yield somewhat, but Jamieson figures that muni yields are headed even lower in the ‘90s.

MUNI YIELDS SLIDE

Average yields on tax exempt municipal bonds have plunged since the early 1980s, and some analysts say they’ll go even lower.

Average yield, Bond Buyer 20-bond index.

Current: 7.32%

Source: Bond Buyer