Wall Street Searching for a Way Out of Trading Range

The stock market is looking for a leader to bring it out of the desert.

That desert is the trading range in which the major market indexes have been stuck since winter.

The Dow Jones industrial average, for example, has mostly just bounced around between 3,600 and 3,800 since March 31. The Dow closed at 3,768.71 on Friday.

Wall Street has been waiting for a new or recycled investment theme to emerge, one powerful enough to overcome interest-rate concerns and pull the Dow and other indexes up to new highs.

But so far, although individual industry sectors have rallied periodically, few of those rallies have had much staying power. Hence the Dow and the Standard & Poor’s 500-stock index have meandered in a narrow corridor, with price moves limited to a 4% to 6% band since late March.

For big and small investors alike, this period has been grating. Few market players are losing enough to feel as if they’re in a bona fide bear market, but neither are they winning enough to feel as if the bull market is still kicking.

“In my 25 years in the business, I’ve never seen money managers so frustrated” with the market, says Edward Nicoski, technical analyst at brokerage Piper Jaffray in Minneapolis.

Of course, it may just be that a large number of the money managers working today have nothing with which to compare this experience. Since the mid-1980s, after all, they’ve mostly known only two kinds of markets: Either stocks have been rising steadily (1985-’87, 1988-’89, 1991-’93) or crashing (late 1987, summer 1990).

This year, the market has shaken off much of the gloom that slammed it early on, when the Federal Reserve Board began to tighten credit in February. The S&P; 500 index now is down just 1% year-to-date, and it has certainly been possible to make substantial money trading moves in individual stocks.

What’s lacking, however, is sustained leadership among key industry stock groups--the kind of powerful share-price momentum that gets investors excited and pulls them aboard.

For example, Nicoski notes that many heavy-industry stocks are trading at or near their 1994 highs, as some investors continue to bet on a strong economy. Most steel and chemical shares, in particular, have rallied briskly this summer.

But the industrial rally hasn’t included some of the group’s bellwether issues, such as machinery titan Caterpillar, which at $105.125 Friday is off 13% from its 1994 peak of $121.50; or steel giant USX-U.S. Steel, which at $39.50 Friday still is down 9% from its year-end price.

Meanwhile, the Big Three auto shares--whose fortunes many investors might most closely associate with economic good times--are mired in their own private bear market. GM stock, now $50.125, is down 23% from its 1994 peak.

Yet in recent weeks, tentative signs of leadership have appeared in several stock sectors, giving hope to Wall Street bulls that a major market move is afoot:

* Technology stocks have roared back from their spring selloff, as bargain hunters have snapped up hardware and software issues that had dropped 40% or more.

Apple Computer, for instance, has zoomed from a spring low of $24.625 to $34.75 now, and is closing in on its 1994 high of $38.50. Semiconductor powerhouse Texas Instruments, which tumbled from $89 to $61 in the first half of the year, is back to $82.

* Health-care stocks, including big drug companies, have been re-energized by takeover fever and by investors’ perception that President Clinton’s health-care reform proposals are in serious trouble on Capitol Hill.

Warner-Lambert, one of the premier drug firms, hit a new 1994 high of $77.875 Friday, and has rallied up from $60 in the spring.

* U.S. packaged food stocks came back to life last week, as rumors resurfaced that foreign food companies are on the acquisition trail. Shares of H.J. Heinz, Kellogg, Hershey Foods and CPC International all jumped 3% to 3.5% on Friday alone.

But can these stock groups gain enough momentum to give the market a meaningful lift? Lehman Bros. veteran analyst Elaine Garzarelli thinks so. Though she still sees the Dow in a trading range in the near term, she believes the top of that range should expand to 4,200 from the current 3,800.

A 4,200 Dow would be an 11% rise from Friday’s close.

Garzarelli sees the economy slowing as the Federal Reserve continues to raise short-term interest rates (another Fed hike is expected this week).

While slower growth could hurt some industrial stocks, Garzarelli expects drug, food, beverage and other classic consumer stocks to continue returning to favor as investors hunt for more stable (i.e., less cyclical) earnings growth. Those consumer-stock groups will be the new leaders, she says.

Other analysts, though pleased with the recent pickup of buying in certain stock sectors, aren’t willing to bet that most of the new market leaders will enjoy a long reign.

David Holt, technical analyst at Wedbush Morgan Securities in Los Angeles, thinks the strength in IBM shares and other technology issues since mid-July bodes well for that group.

But the problem for the market as a whole is that investors perceive most stocks to be fairly priced now relative to earnings expectations and interest rates, Holt says. “I think there’s very little overvaluation or undervaluation in this market,” he says.

Although fair valuation sounds comfortable, it results in a churning market, Holt says: Institutional investors run from stock to stock, herding in when they collectively sense undervaluation, and quickly selling once a stock smells even faintly of overvaluation.

Investors “keep turning over rocks to find new (ideas),” Holt says, but they don’t keep what they find for very long. “It’s producing a very fractured, disjointed market.”

Piper Jaffray’s Nicoski argues that investors who are waiting for new stock leaders to signal a return of the bull market will be sorely disappointed.

Like the market of the late 1970s, this one could continue to churn for a long time, tugged by rising interest rates on one side and higher corporate profits on the other, Nicoski says.

In previous such periods, he says, “to try to be bullish or bearish was not the proper approach.” Instead, the successful investor targeted individual stocks, waited patiently for them to fall into bargain-price range, then bought aggressively.

“You probably ought not to label this market anything, but just learn to take advantage of selloffs in quality stocks,” Nicoski says.

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More California Bonds: Less than a month after borrowing $7 billion via short-term notes, the state of California will raise another $700 million this Wednesday in a general-obligation bond offering.

The bonds, part of the voter-approved backlog for new schools, prisons and other facilities, will be issued in maturities ranging from one to 30 years. Half the $700 million will be sold in one- to 10-year maturities.

Wall Street municipal bond analysts were mixed Friday in assessing potential demand. Some worry that individual investors, who typically are heavy buyers of shorter-term maturities at state bond offerings, got their fill in the July sale of $7 billion in 11-month and 21-month securities.

That record borrowing was necessitated by the state’s ongoing cash crunch.

“There’s no way (individuals) will be able to absorb” the new bonds so soon after July’s offering, one muni bond trader said Friday.

Others, however, said many individuals who tried to buy the short-term notes in July were shut out by strong demand from institutional investors, and thus could still be hungry for tax-free yields.

Traders said Friday that they expect the three-year portion of Wednesday’s offering to yield 4.75% to 4.85% annualized. Five-year bonds in the offering could yield 5.10% to 5.30%, and the 10-year issue 5.60% to 5.70%.

In the 34.7% combined federal and state tax bracket in California (taxable income of $61,241 to $91,850 for a couple), a tax-free yield of 4.75% would be worth 7.27% on a taxed investment such as a bank CD. A 5.60% tax-free yield would be worth 8.6%.

The bonds can be purchased through brokerages and at major banks’ investment desks, usually in minimum lots of $20,000 to $25,000.

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Briefly: The national association of investment clubs holds its 44th annual meeting and expo this week. The event, expected to attract more than 10,000 people, was supposed to be in Los Angeles but was switched to Denver in the wake of the Jan. 17 Northridge earthquake.

The Trading-Range Market

The broad stock market has traded in a fairly narrow range since late March, but individual stocks have swung wildly--producing hefty profits for investors who have been smart enough to buy at the lows. A look at prices of 12 stocks at year’s end, March 31 (near the market’s spring low), June 14 (the Dow industrials’ summer high so far) and on Friday.

Stock Dec. 31 March 31 June 14 Friday Scientific Atlanta 33 1/2 27 1/2 36 5/8 39 3/8 Amgen 49 1/2 38 1/4 44 3/4 53 3/8 H.F. Ahmanson 19 5/8 16 7/8 19 7/8 21 7/8 Warner-Lambert 67 1/2 61 7/8 70 3/4 77 5/8 Avery Dennison 29 3/8 27 7/8 31 1/8 34 Circuit City 21 3/4 19 7/8 21 3/4 23 3/8 Citicorp 36 7/8 37 1/2 41 7/8 42 1/2 Tele-Commun. A 30 1/4 20 3/4 21 1/4 23 Coca-Cola 44 5/8 40 5/8 39 7/8 44 1/2 Kellogg 56 3/4 50 7/8 54 3/8 55 3/8 Hilton Hotels 60 3/4 57 53 60 5/8

Pct. change Stock 3/31 to now Scientific Atlanta +43.2% Amgen +39.5 H.F. Ahmanson +29.6 Warner-Lambert +25.5 Avery Dennison +22.0 Circuit City +17.6 Citicorp +13.3 Tele-Commun. A +10.8 Coca-Cola +9.5 Kellogg +8.8 Hilton Hotels +6.4