Profit-takers may well find Wall Street's the best garden going

Investors nearing the end of February are dreaming dreams of spring. Stocks sprouted nicely in the frosty days of January and early February, but will the promise fade? Should profits be harvested quickly in case a chill hits? The urge to lock in those early profits has made it difficult for the Dow Jones industrial average to stay above the 1,300 mark: It closed Friday at 1,282.02, down 7.95 points for the week, after a series of big daily ups and downs. But some market hands contend that once stock profits are taken, investors will have little choice but to reinvest in stocks. That could keep the market stoked.

It is perhaps easiest to understand this phenomenon by looking at the interest rate table on the right side of the page. Those are respectable rates, but they are not really thrilling if interest is the thing for you.

During the 21/2 years that the stock market has been in a bullish phase, interest rates were unusually high, especially when adjusted for declining inflation. You could always take your profit from a rising stock price, reinvest it in a good, safe fixed-income vehicle -- a certificate of deposit, a Treasury bill, a money-market fund -- sleep soundly, and get 12, 13, 14 percent return.

That is no longer so. Today, you are looking at interest rates of 81/2 to 9 percent for the short term and just a hair over 11 percent for the long term.

Compare that with the price (let alone dividend) gains you could have had on stocks in the NASDAQ composite index since the first of the year: 161/2 percent. Or the gains on the composite index of the New York Stock Exchange: more than 91/2 percent. Or Standard & Poor's 500: more than 9 percent.

The point to consider: If you take a gain, can you reinvest and get a more attractive return -- especially short term -- than you can in stocks? From the experience of the past six weeks, it's difficult to see how.

Of course, no one knows if stocks will keep up their current pace; an interest-bearing investment at least guarantees a set return. But interest rates are moderating, and few voices are predicting big increases soon. Few other investment alternatives seem alluring. Real estate is doing OK in some cities, but you can't put your money in any old property today and watch it grow as you could in the 1970s. Gold and silver prices are weak. Art investments are, well, in the eye of the beholder.

Hence, even though the Dow was lurching and stalling last week, many market analysts think it is heading higher because of the inherent attractiveness of stocks. Some of their opinions:

``If money is looking for a new home, it's going to be looking at other stocks,'' says Hildegard Zagorski, market strategist at Prudential-Bache Securities. ``Everything has moved up in the past weeks, so finding another entry spot will be difficult.''

``The current [stock market] move is not over,'' says Robert J. Nurock, who publishes ``The Astute Investor'' newsletter in Paoli, Pa. ``We're telling our readers not to be churned out of their positions by occasional setbacks.''

``The market is where it is because it thinks it saw Camelot,'' says Monte Gordon, market strategist with the Dreyfus Group in New York. ``It's still there, but it's getting a little fragmented. You don't have the same centralized thrust.''

These three analysts all expect the onward-and-upward theme to be broken occasionally by ``corrections'' -- periods of selling to take profits.

Mr. Gordon thinks Camelot will remain on the horizon as long as the Federal Reserve is perceived to be relaxed on the money supply. But he thinks recent estimates of a 1,450 or 1,550 Dow are nothing more than ``the art of extrapolation'' used by eager brokers. Near term, he sees a continued uptrend, but toward May or June investors ``could become susceptible to subsurface worries . . . and those will wear down the optimism.''

Ms. Zagorski sees pullbacks as ``shallow in nature'' and is counseling caution in the near term. But over the long term she is bullish. The best-performing stocks, she says, will be in a ``dumbbell'' pattern: On one side of the dumbbell are interest-sensitive stocks such as electric utilities, telephone companies, insurance firms; on the other are high-tech firms.

Mr. Nurock thinks it's likely that large-capitalization stocks, which he says institutional investors used as a defensive play the past few years, will be ``unwound'' by speculation. As a result, he says, secondary stocks ``will experience a broad rotational move upward.'' The choppy pattern last week encourages Mr. Nurock, who specializes in market timing: ``When no one believes in the market, I think it has its best chance at significant tops.'' Chart: Interest rates. Source: Bank of Boston.

Percent Prime rate 10.50 Discount rate 8.00 Federal funds 8.38 3-Mo. Treasury bills 8.46 6-Mo. Treasury bills 8.73 7-Yr. Treasury notes 11.27 30-Yr. Treasury bonds 11.36