Plotting strategy around the runs of August
OK. Having seen the big stock-market boom earlier this month, perhaps you're wondering: Has it run its course? If I buy, will I be buying high only to watch the price erode?
First, let's decide if you're an investor or a trader.
* If you're an investor, your decision about a company should be based heavily on the quality of that company's product and management - and your best assessment of how that company will fare against the competition and in an ever-changing economic environment. You look at a company's fundamentals.
If the company looks good, you still ought to know something about how to time your purchase of that company's stock. If the stock price has been carried quite high in the recent rally, you might want to wait for moments of weakness in the price before you buy. Once you have a piece of this fundamentally sound company, you'll have to have the stamina to hold onto it over the long term, despite oscillations in the broader stock market.
* If you are a trader, or short-term investor, it is likely you will be interested in how a stock will perform pricewise over just the next few months. In that case, you may glance at the fundamentals of a company, but mostly you look at technical signals that indicate which way and how fast the market is moving. Then you ride the market. Or you use a strategy - anything from stock options to short selling - to wring the most profit out of the market.
For both types of investors, the stock market today presents opportunities and pitfalls. The Dow Jones industrial average, which closed Friday at 1,211.90 (down 6.19 for the week), is well above its 1984 low. In recent days, however, it has been experiencing some erosion of the highs it hit in early August.
The economy is important to monitor for both technical and fundamental (i.e., trading and investing) reasons. Last week a number of government reports indicated the economy is in fact slowing down to a more modest pace: Consumer spending has dropped, housing starts have declined, and building permits dropped.
But all was not rosy. Another report showed that industry was eating up more of its capacity, giving some cause for concern on the inflation front. And the money supply jumped a surprising $5.2 billion; that could put upward pressure on interest rates.
Still, the bond market continues to perform well (although some of its strength late last week may have come with an announcement by Treasury Secretary Donald Regan of a new package to make it easier to sell Treasury securities to foreigners). And the stock market was doing well, too, at week's end.
Few analysts are expecting uniformly smooth sailing on the credit and equity markets.
Some market analysts call this a consolidation phase. The boom, after all, had to slow to a more sustainable pace. Investors, these analysts add, might still want to buy into a ''secular bull market'' that will be in effect for much of the decade. Traders, on the other hand, might want to keep a weather eye on the market in the next few months.
Richard Yashewski, director of technical analysis at the Butcher & Singer brokerage firm, had been cautious about the early-August boom when it occurred. But the strength of that boom now causes him to think that it is not quite over yet.
''When you have as strong an upward momentum as it has been,'' Mr. Yashewski says, ''it is rare that it is reversed quickly.... The initial signs of sentiment (of investors overall) indicate that this rally is being believed in a lot quicker than it was in August '82.''
While he does not see this rally as either the beginning of a new bull market or as the second leg of the 1982 bull market, Yashewski does think it has achieved much ''credibility'' in a short time.
His investment advice: Traders should buy into the market, expecting the Dow to rally toward a new high in the next month or two. He even suggests a kind of pure bullish purchase for traders: the stocks of brokerage houses. If one's ''market timing is right,'' Yashewski says, ''it is a tremendous trading opportunity,'' although by the middle of the fourth quarter of this year a trader might have to consider changing course.
Investors, he says, should stay with ''disinflationary'' stocks such as retail outlets, restaurants, and soft drink companies. He says that this remains a good place for long-term commitments and that periods of weakness in stock prices are even better.
At the Cleveland investment firm of Prescott, Ball & Turben, technical analyst Rao Chalasani also believes the market is ''consolidating'' in the midst of a longer-term rally. PB&T projects that the economy will grow at a steady pace through 1985. For long-term buys, Mr. Chalasani favors stocks that reflect the wide range of prospering American industry - especially trucking, automobiles, telecommunications, and high-quality manufacturing.
Even for the traders, the market's dips and jumps offer opportunity, he says: ''There's already been some weakness in the rally. Some areas have given up one-third of their (early August) gain already. Stocks are rotationally correcting.''
William Raftery, technical analyst at the Smith Barney, Harris Upham brokerage, agrees that the market is in a normal, short-term ''correctional cycle.'' Mr. Raftery, too, sees the ''consumer disinflationary'' sector of stocks (examples: the auto industry, beverage companies) as good for the long-term investor.
For the trader, he sees the Dow as having a potential level this year of 1, 280. But he notes the mixed signals that are coming from some of the technical indicators he tracks. For instance, he says, only a small percentage of investment advisory services remain bearish. As a contrarian's signal, this is somewhat troubling, for it indicates that too many people may have jumped onto the bandwagon already.
Interest rates Percent Prime rate 13.00 Discount rate 9.00 Federal funds 11.63 3-Mo. Treasury bills 10.72 6-Mo. Treasury bills 11.23 7-Yr. Treasury notes 12.71 30-Yr. Treasury bonds 12.45