New York — One of Wall Street's old chestnuts is ``Markets climb on a wall of worry.'' That is, the more skepticism surrounding a rally, the longer it lasts. When a majority of the investors gets too optimistic, then the rally pauses.
Well, the Dow still hangs high above the 1,500 mark. But the ``worry quotient'' slipped early last week when investors got a little slap-happy. The Dow Jones industrial average boomed Monday, then spent the remaining sessions waffling amid heavy trading. By Friday's final bell, it had risen/fallen xx.xx points, finishing the week at 1,5xx.xx.
``I wouldn't be surprised if we didn't have a rather quiet time through Christmas,'' comments Robert H. Knapp, author of a Cazenovia, N.Y., market letter bearing his name.
Mr. Knapp, a 30-year technical veteran of Wall Street, notes that the ``psychological indicators'' that would point to a continuing rally are temporarily out of whack.
Specifically, the ``odd-lotters are buying pretty heavily'' and the put-to-call options ratio is down. Both are signs that the public is increasing its buying. Another old chestnut is that ``When the little guy buys, the smart money sells.''
But a mite too much public exuberance is the only problem with this market, according to Knapp. All other technical indicators are green. ``If we get enough of a correction here, perhaps two or three weeks into January the bulls will be back on the wall of worry and this market can head on up,'' he says.
That's good news for companies going public. Already the number of filings for initial public offerings (IPOs) is on the rise.
``Assuming this market rally continues, investors' appetites will become more speculative and two or three months from now you should see more volume and higher-priced IPOs,'' says Norman Fosback, editor of the New Issues market letter.
So far, the 1985 IPO market has been characterized by strong volume at fair prices. One of the classic IPO pitfalls, especially in bull markets, is that investors get stuck with an overpriced stock. A few weeks later, the stock collapses. But the memory of 1983, when newly issued stocks were bid up in a speculative frenzy, then plummeted, has kept 1985 a buyer's market.
``Everybody still remembers being burned,'' says Binkley Shorts, manager of the Over-the-Counter Securities mutual fund.
Fairer valuations have been the result. Mr. Shorts recalls several times when he rejected a broker's price on an IPO, only to have the broker call back later offering the stock at Shorts's suggested price. ``New World Pictures was offered to us at $8 to $10. We said $6.50. They came back to us later at $6.50. We took 10 percent of the offering. Now its trading at 111/4,'' he notes.
As further evidence of fair pricing, Craig Davis points out that 14 of this year's 20 largest IPOs were trading above their initial prices as of Dec. 4. ``IPOs are always risky, but the caliber of companies has improved over 1983,'' says Mr. Davis, a research analyst at Howard & Co. in Philadelphia.
If this bull market continues, two months from now a new-issues deluge may be upon us. (There's a lag between the paper work and the offering.) Norman Fosback's advice to long-term investors: Shop now before the rush hits and prices get pumped up.
Investors interested in these risky stocks might consider one of the findings of a recent Forbes magazine study. The best IPO records were compiled by regional rather than national underwriting brokerages. Regional firms, the study explained, don't have a big ad budget to compensate for poor judgment. They worry more about their reputation in the local communities. Therefore, they look more closely at an IPO and price it more conservatively.
As for individual selections, Shorts steers clear of all technology stocks. ``Their product cycles are short, and I usually don't understand the technology,'' he says.
Instead, he prefers oddball companies that slip through the analytical cracks at the large brokerge firms. ``If the company isn't in a categorizable industry, the analysts don't tend to get interested. And you can get some real bargains that way.'' He buys about one out of every 20 new issues he investigates. Chart: Interest Rates. *Yields; Source: Bank of Boston.
Percent Prime rate 9.50 Discount rate 7.50 Federal funds 8.00 3-mo. Treasury bills 7.02 6-mo. Treasury bills 7.03 7-yr. Treasury notes 8.90* 30-yr. Treasury bonds 9.30*