First Ask, Why Do I Want to Buy Now?

If you’re an individual investor who’s tempted to dive into stocks after watching the market surge to new highs on Monday, the first thing you should do is take a long, deep breath.

Rather than rush in at what could be the tail end of a sharp advance, experts say investors should first ask themselves why they’d want to buy now.

Specifically, are you a long-term investor who believes that the economic outlook for 1999 and beyond fully justifies a rising stock market? Or are you a short-term trader who’s simply anxious to cash in on market momentum?

“The big question today is, are you making a long-term investment or reacting to a market?” said Jonathan Lee, managing partner of Hollister Asset Management in Century City.

Many investors, after being scared off by the market’s summer pullback, stashed all or part of their portfolios in money market funds or other “cash” accounts. But unless they had the foresight--some might say the luck--to get back in when stocks began rebounding in early October, they’ve lately watched other people make huge paper profits while their cash returns have dwindled as the Federal Reserve has cut interest rates.

At least one important lesson from this rebound is an old one: Timing the market is very, very difficult. That’s why many financial pros say no investor should ever be completely out of the stock market.

If the question is whether to put additional money to work in stocks now, the market’s bulls think there are plenty of reasons for enthusiasm. Not only has the summer market crisis--sparked by sinking foreign stocks and teetering institutional “hedge” funds--subsided, but the bulls say the global economy’s outlook is improving.

What’s more, some analysts say the widespread concerns about corporate profits--which fell 3.2% for the blue-chip Standard & Poor’s 500 companies overall in the third quarter--are overblown.

Yes, earnings have been hurt by Asian economic woes, the bulls say. But if Asia is bottoming and the United States and Europe surprise naysayers with stronger-than-expected economic growth next year, earnings growth may well revive.

Bears counter that the market is more overvalued than it has ever been and that recent gains are ominously concentrated in a handful of big stocks, just as they were when the market peaked in July.

Move Cautiously, and Have a Plan

For those who want to buy into stocks now, the best advice may be this: Move cautiously and stick to a disciplined buying strategy.

“They shouldn’t just go out emotionally and throw all their money at the market,” said David Ryan, head of Ryan Capital Management, a Santa Monica-based hedge fund. “They have to have a set of rules.”

Ryan and other bulls believe the market is in an uptrend and that there are good stocks to buy.

Ryan, a onetime protege of Investor’s Business Daily founder William O’Neil, says many of the strongest stocks made their moves several weeks ago when the recovery began and have become extended. Nevertheless, he likes Nokia (ticker symbol: NOK/A); Mohawk Industries (MHK) and Sonic Automotive (SAH).

The bullish case goes like this: Rather than a bear market, the summer pullback in stocks was a selling panic caused by a flood of bad news hitting all at once. But now, thanks in part to three Fed interest-rate cuts, the economy will steer clear of a recession and consumer spending will remain strong heading into Christmas.

Peter Canelo, an equity strategist at Morgan Stanley Dean Witter in New York, says corporate profits were clipped by several one-time events this year, besides Asia, that will not be present in 1999.

For example, some big technology companies incurred operating losses in the first half of the year as they spent money to retool their plants for a new product cycle. Banks and brokerages suffered big hits from trading losses. And oil companies were clobbered by falling oil prices.

Altogether, he says, those forces slashed more than $20 billion from operating earnings for the S&P; 500 this year.

But these forces are unlikely to emerge again in 1999, and without them, earnings next year could rise 10% or more, he says.

As for stock sectors, Canelo likes technology, retailers, regional banks and drug companies.

Canelo concedes that, looking at price-to-earnings ratios relative to interest rates, blue chip stocks are overvalued by about 5% to 6%. But in the last several years, the market has frequently surprised Wall Street by remaining overvalued compared with historical yardsticks. Canelo says that even with the current overvaluation, “that still gives you room for 10% to 15% higher prices, depending on earnings.”

Some other forces are positive. Though they’ve backed away from their extremely aggressive buying of several weeks ago, corporate executives continue to scoop up shares in their companies at a brisk pace, data show. That’s a sign that despite the recent run-up in stock prices, those in the best positions to understand their companies still feel they’re good values.

What’s more, sharp gains in many foreign markets--especially battered Asian markets--suggest more global investors believe the worst is over for the financial and economic crisis that began in Asia in mid-1997.

Not All Factors Are So Positive

Even so, although blue-chip indexes such as the Dow and S&P; have soared to new highs, other indexes and market indicators are not nearly so positive.

Smaller stocks, after an initial rally last month, have cooled the last two weeks. What’s more, gauges of market breadth and volume, which are used heavily by so-called technical analysts to test the condition of the broad market, are far below their highs earlier this year.

For example, advancing stocks on the New York Stock Exchange outnumbered declining issues by a 3-2 margin Monday. On a day on which the Dow surged almost 215 points, that’s a weak performance, said Richard McCabe, chief technical analyst at Merrill Lynch & Co.

Advancing stocks should lead by a far wider margin on such a day, he said. In fact, a cumulative index that measures daily advancers versus decliners didn’t even hit a peak Monday, he said. It actually reached a higher level earlier this month.

The picture is much the same for the number of stocks hitting new 52-week highs. On Monday, 126 NYSE stocks hit new highs, compared with 31 at new lows. But the peak this year was in March, when 372 stocks hit highs in a single day.

In a truly strong market, these measures would “confirm” the movement of the indexes by also hitting new highs. Instead, stocks’ gains appeared concentrated in larger issues, as was the case in July--just before the Dow peaked.

Likewise, NYSE volume has been relatively tepid lately, a sign that “we’re going up with less momentum,” McCabe said.

The smaller stocks that have been on the rise lately have been Internet issues, often with no earnings. Such a speculative buying frenzy often signals the end of a rally. For example, the small-cap market peaked in late April around the first time that no-name Internet issues began zooming this year.

“This thing is getting awfully lopsided again, [with the market] tilted toward the blue chips, plus the frenzy going on in the Internet stocks,” McCabe said. “I think we’re getting pretty close to an ending of the whole recovery trend that the market has been in since early October.”

Sentiment gauges also have turned decidedly bearish. In the latest poll taken by Investors Intelligence, 57% of investment advisors say they’re bullish. That’s the highest level of bullishness since January 1992, McCabe said.

In the contrarian ways of Wall Street, excessive bullishness is actually a bearish sign for two reasons. First, history has shown that the crowds are often wrong in their assessment of the market’s direction. Second, when too many investors are bullish, they’ve already dumped their money into the market. That means there’s less fresh cash left to power equities higher.

Of course, for truly long-term investors--as opposed to market timers--all of this may be moot. You can find good stocks to buy in any market if your time horizon extends out a few years. And if the global economy expands next year, it may be tough to keep investors away from the stock market.

Some experts say investors should put new money to work in stages: Rather than make an all-or-nothing bet on favorite stocks now, “I’d put half in now, and then hope for a pullback in the overall market or in individual securities that you might want to add to,” said Marshall Front, chairman of Trees Front Associates, a Chicago investment firm. Front believes many big-name stocks that have suffered setbacks can still be had at reasonable prices.

Among financial stocks, he likes Citigroup (CCI), Household International (HI), Chase Manhattan (CMB), Mellon Bank (MEL) and American International Group (AIG). He also favors Monsanto (MTC), Mattel (MAT), Walt Disney (DIS), Gillette (G), PepsiCo (PEP) and LM Ericsson (ERICY).

Who should not buy now? Those who panicked and exited a few months ago, some experts say. “You have to realize that you did what average investors always do,” Lee said. “While the market was at its highest state of turmoil, you panicked and got out.”

Now “the worst thing you could do is buy in again,” because of the risk that you’d be buying at another near-term peak, Lee said.

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The Bulls Take Over--Again

The Dow Jones industrial average soared 214.72 points, or 2.3%, on Monday to a record close of 9,374.27, eclipsing the previous closing high of 9,337.97 set on July 17. After what was the shortest “bear” market ever, by some measures, the bulls have taken control again on Wall Street, buoyed by interest rate cuts and a return to calm in many ravaged foreign markets. The Dow index, daily closes:

July 17: Dow peaks at 9,337.97

Aug. 4: Asia worries mount

Aug. 27: Russian ruble collapses

Aug. 31: Global fears worsen

Sept. 24: Near-failure of huge hedge fund

Sept. 29: Fed cuts rates

Oct. 9: Yen surges

Oct. 15: Fed cuts again

Oct. 16: Japan OKs bank bailout

Oct 23: Brazil bailout set

Nov. 19: Fed cuts third time

Monday: 9,374.27

The Dow vs. Other Indexes

The Dow and the Standard & Poor’s 500 index hit new highs Monday, but most broader market indexes remain below their 1998 peaks and are up less than the blue-chip indexes. The tech-stock-heavy Nasdaq composite has beaten the Dow and S&P; year-to-date but still is below its July top. Year-to-date percentage changes:

Nasdaq composite: +25.9%

S&P; 500: +22.4

Dow industrials: +18.5

Wilshire 5,000: +16.5

NYSE composite: +13.9

S&P; utilities: +9.7

S&P; transports: --4.5

Russell 2,000 small-stock: --8.9

Source: Times Research

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Can the Market Go Higher?

Here’s a look at some of the reasons stock prices may continue to advance--and some of the reasons they may be nearing a peak.

YES

* The Federal Reserve is on the market’s side, with three interest rate cuts since Sept. 29.

* The period from November through January is seasonally a strong one for stocks.

* Corporate insiders have been heavy buyers of their own stocks in recent weeks.

* Takeover mania is back, and deal volume could continue to soar as companies look to boost growth.

* Most foreign markets have rallied with U.S. stocks, with battered emerging markets gaining the most in recent weeks.

* The international bailout package for Brazil seems to have halted the threat of a currency devaluation in that country.

* U.S. consumer spending remains strong. That’s two-thirds of gross domestic product.

* The federal budget remains in surplus.

* The threat of impeachment of President Clinton appears to have passed.

* Commodity prices continue to slide, with oil near 12-year lows.

* The arrival of the new Euro currency on Jan. 1 could drive further economic optimism in Europe.

* Japan’s latest steps to revive its economy have been surprisingly bold.

NO

* Stocks’ prices relative to underlying earnings are in the stratosphere, at least for many big-name issues.

* Corporate earnings growth has been the weakest since 1991 yet analysts’ expectations for 1999 growth remain high.

* The craze for Internet stocks has all the makings of a classic speculative “blowoff.”

* The Fed may be finished cutting rates.

* Bullish sentiment is at historically high levels among investment professionals--often a “contrary” indicator that signals a market peak.

* Smaller stocks have lost their momentum in recent weeks.

* Corporate capital spending is expected to weaken in 1999.

* U.S. consumers’ savings rate has gone negative, which calls into question continued strong personal spending.

* Investor sentiment could be vulnerable to any new shock from abroad, such as a political shake-up in Russia.

Source: Times reseach

*

Mergers Spark Market Mania

A takeover frenzy helped push the Dow industrials to an all-time high of 9,374.27. A1, C4

An AOL-Netscape union would shift the balance of power on the Internet. A1

A stock-by-stock look at how the Dow components have fared in the latest rally. C7