Once Again, Tech Stocks Are Hot, but Be Choosy

Technology has led market advance, but promises to remain volatile

Technology stocks have roared back to life, waking up the market with them.

But before rushing to plug technology issues into your own portfolio, investment professionals urge caution. Be choosy, they say.

Spurred by solid earnings, low inflation and moderate economic growth in the US economy, the high-flying US technology sector again became the power surge behind the Dow, pushing the industrial average above 7000 on Thursday.

"This is definitely a time to be selective in regard to high-tech stocks and smaller-cap stocks," says Richard McCabe, chief market analyst at Merrill Lynch & Co. Several high-tech issues, including giants Intel and Microsoft, surged last week, after floundering in February.

And that caught Wall Street by surprise.

The focus now is on the stocks of smaller companies, in both the technology sector and the general market. So far, these "small-cap" shares have underperformed the broader market indexes, and it may be their turn to share the spotlight.

Small-cap firms are largely represented by the Russell 2000 stock index, which, for 1996, gained 16.54 percent, compared with almost 23 percent for the Standard & Poor's 500 index, which represents large industrial firms.

Through January 1997, the Russell 2000 rose only 2 percent, compared with 6.24 percent for the S&P 500.

Still, within the larger universe of small-cap and other secondary issues, selected technology companies look promising, says Rao Chalasani, chief investment strategist at Everen Securities Inc. in Chicago.

Last year, the high-tech mutual funds tracked by Morningstar Inc. in Chicago were up 19.99 percent, slightly less than the 22.95 percent gain of the S&P 500. For January this year, Morningstar's high-tech sector sailed to the top of the class: up 7.83 percent.

The small-caps can be a powerful warning bell for the rest of the market. They tend to be among the last issues to rally in the final stages of a bull market, as investors shift away from expensive blue-chip issues to cheaper, more speculative securities. To date, investors are shying away from small cap stocks. That may be good news for the market, as investors now set their sights on an 8000-point Dow.

There are two basic ways to buy small company stocks:

* You can purchase individual shares through a broker.

* You can buy into a mutual fund.

Given the volatility of small-company stocks, the safest approach is to buy a mutual fund, analysts say. Mutual funds provide instant diversification among many companies.

A number of high-tech funds have performed well in recent months, reflecting consumer demand for electronics and computer products. In fact, two of the funds on that list, Fidelity's Select Computer Fund and Select Electronics Fund, are record setters. Along with the Mairs & Power Growth Fund, these are the only tech funds outperforming the S&P 500 each year since 1990. Another five-star fund is the T. Rowe Price Science & Technology Fund.

If you choose to buy individual small-cap or high-tech stocks, Mr. McCabe of Merrill Lynch advises investors to wait a while. He predicts a market dip of 10 percent or less by spring. Waiting will present buying opportunities. Another opportunity could come later in the year, he says. McCabe says there could be "a major market downturn of 20 percent or more, probably after the end of the second quarter."

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