Market rally - some see a march; some, a mirage

Resting poolside. A stock chart in one hand, a glass of something tall and cool in the other. Altogether, basking in the shimmer of the summer rally. Well, don't get too comfortable. The technicians say this rally has a miragelike quality about it.

Sure, the Dow Jones industrial average rose 16.01 points last week, hitting record highs along the way. By Friday's closing bell, the Dow stood at 2,436.86.

But rather than share in the sun dance, Susan MacFarlane calls the rally ``very scary.'' The analyst at John Magee Inc., a Boston charting service, adds, ``There's just a few narrow little up-channels. I would be leary of buying much here.''

Chart followers are bothered by the fact that it's a rally that includes only the Dow 30 and perhaps 40 or so other issues. ``The quality, in terms of leadership, is good. But the breadth is not so good,'' says Edward Nicoski, chief market analyst at Piper, Jaffray & Hopwood, a Minneapolis-based brokerage firm.

Since trading has been narrow, volume has been lighter than usual. Since late May, the Dow has charged about 230 points higher. But during that time, there have been only 10 days when New York Stock Exchange trading volume exceeded 160 million shares, and it topped 200 million only once. By comparision, volume exceeded 160 million shares on all but one day during the January rally, and 200 million six times.

Another beacon to technicians, the ratio of stocks hitting new highs versus those dropping to new lows, has not been encouraging. Mr. Nicoski at Piper Jaffray notes that 177 of the 325 groups he tracks were making 26-week highs just two months ago. This past week, only 44 groups hit new highs.

``That's indicative of narrow leadership, and that we're getting to the end of this move rather than beginning another major move,'' Nicoski says.

Even Joseph Granville, the born-again bull market guru, predicts a sell-off shortly. Granville's Options Portfolio letter has taken first place so far in the Hulbert Financial Digest performance derby for 1987. Granville's picks are are up 222 percent. But his prognosis is for a 200-point Dow drop next month, before it closes out the year in the 2,500-to-3,000 range.

But William LeFevre, a market strategist at the Advest brokerage, based in Hartford, Conn., isn't daunted by the technical soft spots. ``Most technicians want to throw this rally away in the waste can, because only a few stocks are participating. But I think it's a more meaningful move than technicians want to admit.''

The basis of the rally, as Mr. LeFevre sees it, is a spate of end-of-the-quarter window dressing and renewed interest by Japanese and other foreign investors. ``Between the two, this rally may stay narrow but it can go a ways,'' he surmises.

This window dressing period consists of portfolio managers selling off positions in lackluster, no-name secondary stocks and fluffing up their portfolios with the brand-name blue chips.

The United States equity market looks appealing now to foreigners, because the dollar has stopped falling. In fact, it has risen slightly against overseas currencies. One can now get about 145 yen for every greenback. That's up from a recent low of about 137 yen.

Japanese institutional investors, in particular, are looking at a ``double play,'' LeFevre says. ``They're buying American stocks because the prices of stocks are cheaper here by comparison, and the dollar's rise against the yen gives them a second kick.''

Large-capitalization stocks are the favorites of overseas investors, and large-cap cyclicals are LeFevre's prime choices. General Motors looks strong, and International Business Machines could go another 40 to 80 points higher, he predicts. Ms. MacFarlane at John Magee is also bullish on those two. She notes that Big Blue has broken through a major resistance level and that GM would rate a ``buy'' if it could crack $94 a share.

MacFarlane also likes the charts on Corning Glass and Minnesota Mining & Manufacturing. Corning, she reports with due seriousness, ``broke out of an ascending triangle pattern in March and recently broke out of a rectangle pattern. Price and volume look strong.''

MacFarlane has one short sale, Cray Research, which has a suspicious-looking ``rounded top.''

If the dollar continues to strengthen, LeFevre would start weeding out the multinational drug stocks, which have had a good run. Back on the buy side: ``If I had some new money coming in, I'd buy some electric utilities,'' he says. These issues have lagged behind the market and are considered ``undervalued'' by some analysts.

Oil prices are also not poised for a major upturn, analysts say. At the start of the first OPEC meeting this year in Vienna, an $18-a-barrel agreement hammered out last December seemed to be the prevailing view.

Unfortunately, notes Frank Knuettel, a Prudential Bache Securities analyst, the December agreement calls for gradually raising production through the third and fourth quarters.

Under that OPEC pact, Knuettel says, oil prices are in danger of falling below $18 a barrel. On Friday, OPEC's president announced the cartel would cut production in the fourth quarter. There is still some question, however, if such cuts will keep prices up.

Already, there's a surplus of oil, production is above quota levels. To rectify the imbalance, Knuettel favors the less-dominant OPEC view championed by Iran and Algeria, which calls for a freeze on production at current levels. But he doesn't hold out much hope for this plan. ``I'm afraid that even if they have a good idea, they won't be heard because of their firebrand rhetoric,'' he says.

Ironically, Iraq's plans to bolster its production by 23 percent in October may be playing into Iran's hands. At this writing, it was unclear which production quota plan would prevail.

Nonetheless, oil prices have weakened recently. The Pru-Bache oil analyst sees prices slipping perhaps another $1 or so. But Knuettel still likes crude stocks for the long term. He believes OPEC has learned enough Economics 101 to keep prices from getting too out of line.

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