Stock Watchers Excited Over Summer Outlook

Technical analysts advise U.S. stock market investors to turn a deaf ear this summer to the British adage, “Sell in May and go away.”

The next few months are likely to see stocks make further progress, according to a survey of more than a dozen technical analysts. Among their picks are oil service stocks such as Halliburton Co., financials like Fannie Mae and paper makers such as Weyerhaeuser Co. The Dow Jones Industrial Average reached a record on Tuesday, but retreated later in the week.

“The bulls deserve the benefit of the doubt,” said Gregory Nie, an analyst at Everen Securities in Chicago. “The technical situation now is bullish,” based on the number of stocks rising vs. those falling, and the volume of shares of each, he said.

The Dow Jones industrial average finished nearly unchanged Friday, rising 0.86 to 7,331.04 after swinging from an 88-point loss to a 41-point gain.

But the most incredible turnaround came in the technology-laden Nasdaq market, which finished slightly lower after tumbling nearly 50 points, or about 3.5 percent, at the open.

Like other technical analysts, Nie focuses on stock prices, volumes and trends, ignoring corporate profits, price-to-earnings ratios, dividend yields, and other “fundamentals.”

Plenty of technicians think selling stocks now would be a mistake. Bernard Schaeffer, president of the Investment Research Institute in Cincinnati, is one. Based on the number of bearish “put” options investors bought when stocks tumbled in March and early April versus the number of bullish “call” options, Schaeffer figures the Dow industrials may reach 8000 in the next six to eight months. The buyer of a put has the right to sell stock at a set price in an allotted time, while the buyer of a call can buy stock at a given price.

“I continue to be pretty solidly bullish on the equity market,” said Schaeffer. “The March pullback created a put-to-call ratio which was actually about as high as it was at the time of the Gulf War in late 1990 or early 1991.” The current bull market began in October 1990.

At the same time, investor sentiment deteriorated in March and April this year, and hasn’t recovered to where it was six months ago. That also may be a good omen for stock prices.

Too much optimism can be a contrarian indicator because when investors uniformly say they’re bullish, most have already purchased stocks. Investors Intelligence newsletter’s weekly survey showed 44.9 percent of investment advisers were optimistic recently, far below a 56 percent reading last December.

Similarly, technical analysts say the “advance-decline ratio” of stocks that have gone up relative to those that have gone down is improving. The New York Stock Exchange’s cumulative advance-decline line bottomed April 14.

“It is recovering, and it’s a positive short-term trend,” Nie said, especially if the A/D line surpasses its March 11 high.

UST Securities Corp.’s Kenneth Tower believes the strength of the stock market’s rally from the end of April through the middle of May points to the Dow industrials reaching 7700, though he won’t say exactly when.

The stock market’s pattern is reminiscent of July 1996, when the Dow average dropped 7.5 percent from its May high, Tower said. “The current rally has plenty of push behind it,” and, he said, will eventually drive the Dow industrials up by 20 percent to 25 percent from April’s low - or to between 7670 and 7990.

Recent records in the Nasdaq Composite and Russell 2000 indexes - the first since late January - confirmed the earlier highs in the Dow and the S&P 500, many analysts said.

“The Russell hitting a new high is certainly a plus,” Nie said, and “lends credibility to the move.” Similarly, the Dow Jones Transportation Average, and New York Stock Exchange Composite and Wilshire 5000 Indexes all rose to records in recent days.

Analysts who aren’t unabashed bulls still paint a pretty rosy picture. After all, the S&P 500 is up 15 percent year to date, so it would be a good year even if, as Philip Roth of Dean Witter Reynolds Inc. said he expects, the market only makes “another nominal new high in the summer.”

Roth sees the market making “minor further progress,” sending the Dow industrials to 7575 and the S&P 500 Index to 868.

Similarly, Richard McCabe of Merrill Lynch & Co., the biggest U.S. brokerage, forecasts the Dow may get to “the mid-7000s” even though the market’s advance “is showing a number of signs of aging, or maturing.”

“My bottom line feeling is that we’ll see some further gains in the market averages into the summer,” said McCabe. “Then, I think this cycle might be pretty well exhausted.” Stocks will fall in late 1997 or early 1998, possibly as much as 25 percent from whatever peak they reach in the second half of 1997, he said.

To be sure, almost every analyst surveyed said all bets for the stock market are off if yields on benchmark 30-year Treasury bonds, now hovering around 7 percent, shoot above 7.20 percent. “If that happens, ‘Katie, bar the door,”’ said Stephen Shobin of Lehman Brothers.

At least one analyst in the group is discouraged by the interest rate outlook, in part because the American Stock Exchange Securities/Broker Index peaked in February, the New York Stock Exchange Financials Index last set a record in March and the Dow Jones Utilities Average has fallen since January.

“All three interest-rate sensitive indexes are not confirming new highs in the S&P or the Dow,” said Mark Arbeter of Standard & Poor’s Corp. “These are the types of stocks that have led the market the past two years. Unless they break out to new highs shortly, these divergences are negative.”

For now, few others are sounding alarm bells.