Why the Bull Looks a Little Less Wild-Eyed

Nearly every major U.S. stock index has reached record levels over the past week, including many small-stock indexes that hadn’t hit new highs since last spring.

Yet the frenzied, speculative tone that characterized last spring on Wall Street seems to be missing today. It doesn’t feel nearly as reckless--and for that reason, this latest bull market surge appears more sustainable, some veteran analysts say.

The biggest difference between last spring and now is that, even as some smaller stocks are finally topping their previous highs, they are rising at a fairly slow pace.

Last April and May, the hot market news every day was about obscure Nasdaq-traded stocks that were leaping 20% or 25% in one session. The Russell 2,000 index of smaller stocks shot up 5.3% last April and 3.9% in May.

So far in January, the Russell--while reaching new highs--is up just 1.4%, with nearly half the month over.

Of course, Wall Street’s bears argue that the speculation has merely shifted to a different stock group this time around: Instead of craving, and overpaying for, smaller stocks, investors are clamoring mindlessly for big-name stocks, the bears say.

The blue-chip Dow Jones industrial average is already up 4.9% this year, after soaring 26% in 1996. Given that many Wall Street pros thought the best the Dow could do in 1997 was rise about 10%, we’re already halfway there--with 50 weeks left to go.

Clearly, some blue-chip names are valued in the stratosphere. Coca-Cola, selling for 40 times estimated 1996 earnings per share, leads the arguably overvalued pack. But for many investors who have an optimistic view of the economy, interest rates and inflation, paying 15 to 25 times estimated 1997 earnings for names like GE, Merck and Exxon simply doesn’t seem like speculating.

What’s more, some analysts who track the market’s “technical” signs--barometers of its internal health--say the blue chips’ strength isn’t the only thing supporting the latest market move, despite the bears’ allegations that this is a very narrow (and thus suspect) advance.

William Raftery, technical analyst at Smith Barney in New York, notes that the Dow utility stock index is holding firm, near its 1996 high. That suggests investors don’t see higher interest rates on the horizon, because utility stocks usually foreshadow a sustained upward move in rates--and a sustained downward move in stocks in general--by sliding well before the rest of the market catches on.

Raftery also notes that, contrary to the bears’ portrayal of this year’s market move as being supported by advances in only a few big-name stocks, 487 New York Stock Exchange issues hit new 52-week highs last week. “That’s not a narrow market,” he says.

Finally, Raftery points out, the stock market has been in continual “rotation,” with leadership constantly shifting among various stock industry groups.

So far this year, the strongest groups are those that would benefit from a pickup in economic growth--industries such as oil and gas drilling, semiconductors, autos and engineering.

In the fourth quarter, in contrast, the top 10 stock industry groups included banks, insurance companies, tobacco companies and long-distance telephone providers.

Shifting investor demand among stock groups is a positive sign for the bull market, not a negative sign, says Dennis Jarrett of Jarrett Investment Research in Westport, Conn. “This is the ideal pattern--you have a stock group run up, then consolidate,” while another group takes over to lead the market up, he says. “We used to call this ‘stairsteps to heaven.’ ”

Raftery’s term for a continuing leadership rotation among stock groups, while major stock indexes like the Dow climb ever higher, is the “self-sealing tire effect”: Any potentially deflating holes (i.e., falling stock groups) are quickly covered by stronger groups.

Paramount Fund Reopens: Bulls and bears alike will probably draw strength from Tuesday’s news that the FPA Paramount stock mutual fund, managed by highly respected stock picker Bill Sams, is reopening after being closed to new money for two years.

It’s not that Sams has run low on cash: 30% of the $685-million fund is in cash currently, because the value-conscious Sams can’t find many stocks that he wants to buy.

Then why reopen? Sams, the No. 1 growth-and-income fund manager for the 15 years ended Dec. 31, doesn’t have a cogent answer. He does say, though, that he hopes his value investing style will attract new investors who “feel like they want to participate in the market, but are scared” of its heights.

Bulls will say Sams is capitulating; bears could argue that Sams must expect a big market decline ahead, and wants to build up even more cash to eventually plow into stocks at lower prices.

For more information on the broker-sold fund: (800) 982-4372.

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Stock Leaders

Here are the stock industry groups that have led the market higher so far this year:

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Group Gain Oil/gas drilling 16.4% Hardware/tools 13.9% Oil well services 12.4% Semiconductors 11.7% Commun. equip. 10.5% Computers 9.8% Aluminum 9.6% Autos 7.8% Electron. instrum. 7.4% Engineer./construc. 7.2% S&P; 500 3.8%

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