A Bull and Bear Brawl

By Charles P. Alexander

Judging by the close of the Dow Jones industrial average on Friday, nothing much happened on Wall Street last week. The Dow finished at 1277.72, up a mere 1.66. In fact, that was only the end result of a heart-stopping, up-and-down week of heavy trading and tumult, of ecstasy and then anxiety. On Tuesday the Dow surged nearly 15 points, to close at a historic peak of 1292.62, breaking the previous record of 1287.20, set on Nov. 29, 1983. No sooner had the shouting stopped, however, than institutional investors, including pension funds, insurance companies and bank trust departments, began to cash in their profits, causing the Dow to give up most of its gains.

Despite the late-week cooling of the Dow, which is based on the stock prices of 30 major companies, including General Motors and Westinghouse, hundreds of second-tier stocks stayed hot. Several broad indexes, including Standard & Poor's 500 and the New York Stock Exchange composite of 1,200 issues, set record highs day after day. Only on Friday did they dip a bit. Thursday's session marked the 19th consecutive trading day in which rising stocks outnumbered losers, another Big Board record. The string was broken on Friday, but volume for the week was 652 million shares, the fourth- highest in history.

The volatility of the market reflected, in part, several mixed signals about the state of the economy. Early in the week the news was good. Investors cheered as reports came from the Geneva meeting of the Organization of Petroleum Exporting Countries that the producers would cut oil prices (see following story). The news buoyed hopes that inflation would remain low in 1985. In addition, the Labor Department reported that the productivity of U.S. nonfarm workers--their output per hour worked--rose at an annual rate of 1.7% in the fourth quarter of 1984, a sharp rebound from the 1.1% decline of the previous three months. For 1984 as a whole, productivity increased 3.1%, far more than the average annual gain of 1% from 1973 through 1983. Investors welcomed the report because higher productivity could help spur economic growth and increased corporate profits.

Later in the week came some less cheerful economic readings. The Commerce Department announced that the U.S. trade deficit surged to a record $123 billion in 1984, far surpassing the $69 billion shortfall of 1983. The ! widening gap means that foreign manufacturers are increasingly taking business and profits away from American companies. The Government also revealed that its index of leading economic indicators, a barometer of future economic growth, dipped .2% in December. Finally, the Labor Department said on Friday that the civilian unemployment rate rose to 7.4% in January from December's 7.2%, even though the number of Americans holding jobs reached a record 106.4 million. Economists were a little surprised at these downbeat statistics, but most are still confident that the economy has enough momentum to avoid a recession in 1985.

Despite the fallback late last week, the Dow is up 66 points, or 5.5%, so far in 1985. That is a stunning contrast to 1984, when the Dow dropped 47 points, or 3.7% for the whole year. Many Wall Streeters now believe that 1984 may have been only a temporary pause in a bull market that began in August 1982.

This year's rally has spread across stocks in a wide range of industries. High-technology shares, which slumped in 1984, are on the move again, led by IBM, the top U.S. computer manufacturer. Since the beginning of the year, IBM's stock has risen 10.4%, to 135 3/4. Hewlett-Packard, another computer firm, has gone up 9.2%, to 37, and National Semiconductor, which makes silicon chips for computers, has increased 13.7%, to 13 1/2. Investors have scored even bigger gains with stocks in companies that produce machine tools, which climbed 21% in January, and shares in hospital-management firms, up 17%. Not surprisingly, brokerage houses stand to profit handsomely from the running of the bulls. Stock in Merrill Lynch has jumped 25.5% in 1985, to 33 7/8, while Paine Webber has surged 40%, to 38 1/2.

The excitement is not limited to the Big Board. Indeed, the highest flyers are smaller, fast-growing companies traded on the American Stock Exchange and the over-the-counter market. The Nasdaq (National Association of Securities Dealers Automated Quotations) composite index of OTC stocks rose a record 17 days in a row before it fell last Friday. The previous mark: eight consecutive days in April 1983. OTC shares took a pounding in 1984, but now they are rebounding almost as fast. Amex's Market Value index has jumped 9.6% in 1985, and the Nasdaq has shot up 12.6%. In the past two weeks the daily volume of trading in Nasdaq shares has averaged 97 million shares, in contrast to 60 million in 1984. OTC stocks are often so inexpensive that even a point rise in their value can mean spectacular returns to investors. Shares in ONYX + IMI, a microcomputer firm, have gone up 81.8%, to 2 1/2, and Comtech, a satellite- communications company, has increased 157.9%, to 3 1/16.

Individual investors account for about 70% of the trading in OTC stocks. By contrast, institutions are responsible for 60% of the trading on the New York Stock Exchange. Small investors are often more willing to gamble on speculative stocks than are the managers of large portfolios. Says Anthony Barrington, 41, a New York City consultant: "I like to go where the action is, and it is in the over-the-counter market. There's some downside potential, but I'm in the mood for risks."

The rally has lured back many individual investors who last year pulled their money out of stocks in favor of safer havens, like money-market funds or Treasury bills. Says Terry Riordan, an E.F. Hutton account executive in Chicago: "There's a lot of excitement. I don't think anyone wants to miss out on this." Observes Ben Bratter, a vice president with Prudential-Bache Securities in Minneapolis: "Nothing infuriates people more than friends' telling them about the money they just made in the market."

Still, some investors remain skeptical. Says Tyrone Po, 25, a Manhattan bank employee: "I'm not convinced it's time to buy yet. The market is too fickle. I don't trust it." Po is waiting for an upswing in pharmaceutical stocks so that he can unload at a profit the ones he already owns. Many brokers observe that small investors are savvier than they used to be. Glorian Donegan of Moraga, near Oakland, Calif., trades stock tips with her colleagues in a 2,000-member investment club. She regularly visits a nearby business library to read investment magazines and newsletters. Last year Donegan attended the shareholders meeting at California Microwave, which makes satellite-transmission equipment, merely because she was considering buying the company's stock. "I think it was important," she says. "The company can paint a rosy picture, but you can learn a lot about its management and attitude by going to a meeting."

More and more self-reliant investors are turning to discount brokerage firms, which offer no investment advice but charge commissions that often are only about one-fourth the fees asked by full-service firms like Merrill Lynch. Several major banks, including Bank of America and Chase Manhattan, have challenged Wall Street's kingpins by offering discount brokerage. At the moment, there is plenty of business to go around. Says Discounter Larry Kelly, president of First Texas Brokerage Services in Houston: "The phones have been ringing off the hook. We're tired, but happy about it. We've seen our trade count double in the past two months."

Many discounters offer investors who own personal computers a chance to buy and sell stocks electronically without having to talk with a broker. All these investors have to do is connect their machines to a telephone and call in to the discount firm's computer. Then they can type instructions for trades on their keyboards.

Investment-minded home-computer buffs can also link their machines via telephone to information services like Dow Jones News/Retrieval or the Source, which provide stock quotations and financial news. With the help of such personal-computer programs as Winning on Wall Street and Market Analyst, investors can become financial analysts in their own dens. Among other things, these software packages allow users to chart the past performance of a particular stock and compare it with the records of shares in other companies or the market as a whole. Edward Gillott, co-owner of a New Jersey company called Anidata, which developed Market Analyst, estimates that 50,000 investors may already be using his firm's programs or similar ones.

Another sign of the growing boldness of individual market players is their enthusiasm for index options. In an option deal, an investor gets the right to buy or sell a contract representing a group of stocks that make up one of the market indexes--for example, the New York Stock Exchange composite--at a fixed price at some future date. What it amounts to is a legal bet on which way the market index is headed. If investors guess right, they can cash in their options at a profit. About 95% of the investors in N.Y.S.E. composite index options are individuals, and the volume of trading has surged 60% since the beginning of the year.

Will the 1985 rally continue? As always, Wall Street opinion is divided. Says Peter Furniss, a senior vice president at Shearson Lehman Bros.: "This is like a frat party. We're having fun now, but soon somebody is going to call the cops, and the party will be over." Furniss predicts that the Dow may retreat to 1245 before making another bullish move. Richard McCabe, market- analysis manager for Merrill Lynch, disagrees, forecasting that the Dow will hit 1300 this month. McCabe believes that several stock groups are still bargains. Among them: companies in the paper, chemical and aluminum industries.

William LeFevre, a vice president of Purcell, Graham, thinks that the Dow may crack 1400 before the bull market is over. "As for the time frame," he says, "we'll cop a plea, using that old bromide of successful Wall Streeters: 'If you're going to give them a date, don't give them a number, but if you're going to give them a number, don't give them a date.' "

There is another Wall Street adage: "As goes January, so goes the year." If that holds, 1985 will be exciting and rewarding for investors.

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With reporting by Thomas McCarroll/New York, with other bureaus