To gauge the market, watch 'Big Blue.'
If you want to gauge the market, the bellwether is ''Big Blue'' - IBM. So says John Connolly, vice-president of the Dean Witter Reynolds brokerage. IBM has the largest capitalization of any company in the world. IBM is the single biggest factor in the two most popular market monitors, the Dow Jones average price of 30 industrial stocks (IBM makes up 8.2 percent) and Standard & Poor's capitalization-weighted composite index of 500 stocks (IBM accounts for 5 .9 percent).Skip to next paragraph
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''IBM price movement,'' Mr. Connolly notes, ''is the bellwether for the market and for technological stocks.''
Failure of IBM to improve on good news at the first of the year signaled trouble for the market as a whole. Both IBM and the market have fallen about 13 percent since early January. At $130 a share earlier this year, IBM was overpriced, Connolly says.
But now, around $105, IBM's ''downside risk'' is low - especially considering IBM's growth potential of 16 percent a year and current yield of 3.6 percent, making its total return around 20 percent. This, Connolly notes, is twice the return on US Treasury bills.
''If IBM firms,'' Connolly says, ''then we might push out the frontiers of risk a little bit into other technology stocks.''
Early last week, IBM began to climb; the market rallied also. The Dow rose 44 .74 points in its first three sessions.
When IBM plateaued, the market leveled off, too. IBM closed Friday at $105.25 , and the Dow at 1,131.07, up 44.17 points since June 15, recovering virtually all its loss from the week before.
Volume during much of the week was high, indicating to some analysts that institutional investors such as pension funds were willing to buy into the stock market after a several-month hiatus. Although some of that activity might have be traced back to the institutional investors' habit of portfolio switching before the end the quarter, there still appeared to be a modicum of faith in the rally that began June 18.
Whether that faith grows appears to depend very much on the future of the bond market, which is linked closely to the stock market. If interest rates level off and the bond market consequently stages a rally, the price-to-earnings ratios of stocks would be greatly helped.
That bond market rally, market watchers say, can come only if interest rates peak and perhaps retreat. Because the nation's money supply has been expanding, however, the Federal Reserve is not likely to allow the kind of even-keel money growth necessary to meet the high credit demands of corporations, consumers, and the federal government without driving up interest rates. The money supply rose January.
Connolly figures the Fed will try to bring the money supply back into line, perhaps achieving this by late July or early August. Thus he sees the much-predicted stock market rally as occurring in late summer or early fall.