PERSONAL FINANCE : DOWN THE ROAD : WIZARD OF ODDS : Taking the Guesswork Out of Stock Investing

For as long as there have been common stocks and dreams of wealth, investors have sought a single statistical measure allowing them to divine the future and make each stock pick a winner. But like the medieval alchemists’ pursuit of the philosopher’s stone, their searches have yielded only frustration.

“If there were a single, perfect measure, it would have been discovered long ago--and then made obsolete as everybody used it at once,” says Kenneth Fisher, president of a money management firm in Woodside, Calif.

In this imperfect world you must instead weigh a number of statistical gauges--from stock indexes to price-earnings ratios to economic measures--to read the market’s vital signs.

That’s not to say it’s easy to interpret them, for too often they contradict each other. Indeed, market analysts are arguing today about whether the signs point to a continued bear market or a surge in share prices.

The shortcomings of the most celebrated market gauge, the Dow Jones industrial average, have been extensively chronicled. The Dow, the oldest and most widely quoted major stock index, reflects the movements of the stocks of only 30 big industrial and service companies--and doesn’t do that particularly well.

Though it is derived from a complicated formula, the Dow is still essentially the sum of 30 stock prices and gives undue stress to movements in issues with the highest prices. It also says little about portfolios of many individual investors, who tend to own stocks of smaller, fast-growing companies.

The index of choice for professional money managers is the Standard & Poor’s 500-stock index, which includes 400 top industrial companies, 20 transportation firms, 40 utilities and 40 financial stocks. The S&P; 500 is valuable because it reflects movements of a much broader slice of the stock market.

It is of particular value for investors with blue chip stocks and those who want to check how their pension portfolios are doing, since such funds often include many blue chip stocks. The S&P; 500 mirrors the market better than the Dow, in part because it is weighted to favor stocks with a large “market capitalization”--that is, the value of a company as calculated by multiplying its total number of shares by price per share.

A contrast to the Dow and S&P; 500 can be found by examining the NASDAQ composite index, which includes 4,700 shares traded over the counter. With its many smaller stocks, the National Assn. of Securities Dealers Automated Quotations index provides a better reflection of what’s happening to many individual investors’ portfolios. Because it includes the stock of so many unproven companies, the index is also a good measure of the level of speculation in the market.

Often the divergence in these major indexes can tell what’s happening in the market. In the weeks after last October’s market crash, for example, the Dow recovered some lost ground, a sign that investors had at least a measure of faith in blue chips.

The NASDAQ, in contrast, showed little bounce, reflecting investors’ fears of the more speculative issues.

All the leading indexes mentioned above are listed in most major newspapers and financial magazines, including The Times.

Also key for a quick understanding of the market’s activity are figures on the market’s volume, or number of shares traded. The market’s generally low volume in recent months has been cited by those who believe that institutions and individual investors will continue to hold back funds from stocks in favor of other investments.

Before October, NYSE volume averaged about 180 million shares daily. Between February and May of this year, the average daily volume fell steadily, dropping to 150 million shares last month. In the first three trading days of June, however, volume roared to an average of more than 200 million shares, spurring hopes that the prostrate market would again come to life.

But volume figures have become more difficult to interpret recently because big investors have been jumping in and out of the markets with computer-directed strategies--called program trading--and with short-term plays aimed at capturing stock dividends. In these dividend plays, investors buy the stocks of utilities and other companies with large dividends for just long enough to claim those payments, then sell them.

In the past few months, some analysts estimate, program trading and dividend capture strategies accounted for two-thirds of the Big Board’s volume.

Statistics on market breadth measure the strength of a trading trend by showing whether rising shares outnumbered those with falling prices. Some sources, such as Barron’s newspaper, publish a single trend line that traces whether rising stocks have outnumbered decliners each week on the NYSE.

The line shows, for example, that gainers outnumbered losers from the end of last December until half way through last March, as the market struggled to recuperate from October’s losses. Between March and late May, decliners predominated; in late May and early June, the advancing stocks again outnumbered decliners.

The pros also find it valuable to measure how a stock index stands relative to a moving average of its value over a preceding number of days. Last September, some market watchers correctly read dire fortunes aheads when the Dow and S&P; 500 fell below their 200-day moving averages. And some saw cause to celebrate on June 3 when the New York Stock Exchange composite index of 1,600 Big Board issues crossed above its 200-day moving average.

Many market analysts keep close watch on price-earnings ratios, calculated for leading stock indexes as well as for individual stocks. The price-earnings ratio for the S&P; 500, for example, represents the average of those stocks’ prices, divided by the average of their per-share earnings.

The price-earnings ratio is a measure of demand. High ratios may suggest that prices have risen too high and are headed for a tumble; low figures suggest a possible opportunity for bargain buys.

The price-earnings ratio for the S&P; 500 index reached about 20 last August as the market peaked, notes Gene Jay Seagle, chief technical analyst at the Gruntal & Co. brokerage in New York. Ratios of 20 or more historically have signaled market tops.

The ratio is now about 14, relatively close to the 10-year low of 12, recorded in August, 1982, just before the five-year bull market took off, he says. That is a bullish sign, he adds.

As they watch such internal market statistics, investors need also to keep an eye on key outside factors, including bond yields and interest rates, inflation, and gold and currency prices, experts say.

The relationship between stocks and bonds draws enormous attention from stock investors. The two are competing investments, and when bond yields suddenly rise, billions can flood to bonds from stocks.

Many market experts believe that falling prices and rising yields of bonds last fall sucked investment dollars from the stock market and had much to do with its collapse.

These days, some analysts believe that the stock market continues to languish because bond yields are relatively high. Investors often look at the gap between stock dividend yields--dividends as a percentage of stock price--and bond yields.

These days, yields on 30-year Treasury bonds are around 9.1%. The dividend yield on the S&P; 500 is about 3.4%, for a unusually large difference, or “spread,” of 5.7 percentage points.

Pessimists argue that bond yields could be forced higher if the economy picks up any steam.