Robust Small Stocks Enjoy Usual January Rise

IT'S mid-January and the small-stock market - almost on schedule - is finding itself in the spotlight.

Shares of small to medium-size companies typically post a price surge in the early part of the new year. That usually occurs after investors have sold off stock holdings for tax purposes at the end of the prior year. But in recent days small-stock indexes have shown unusual strength. Since the late 1980s, the small-stock surge has been one of the most powerful market drivers, analysts say.

Moreover, final figures for 1991 show that small stocks dominated the market last year - far outperforming "big stock" measurements such as the Dow Jones industrial average and the Standard & Poor's 500 index.

And small stocks, say analysts, could do well in 1992, in part because they will be given a boost by the new global trading system to be introduced by the National Association of Securities Dealers on Monday.

The new system, called NASDAQ International, will allow securities to be traded between London and New York during the morning hours, from 3:30 a.m. until 9 a.m. Eastern time. Although the London Stock Exchange is open during those hours, the New York Stock Exchange is closed. Through its new computerized trading system, NASDAQ plans to allow trading in selected large over-the-counter stocks, as well as some stocks traded on the Big Board.

The NYSE currently has no similar night-trading system, although it has said that it is studying such a program.

Specializing in hundreds of small to medium-size companies, NASDAQ has become the second-largest exchange in the United States, surpassing the American Stock Exchange in the number of companies traded and in volume. NASDAQ lists more companies than all other US exchanges combined.

Although NASDAQ's new trading system is expected to start out modestly, there was nothing modest about NASDAQ's gains during 1991. During 1991 large blue-chip stocks - as measured by the Dow - rose 20.3 percent. The broader S&P 500 rose 26.3 percent. But the NASDAQ Composite Index shot up 56.8 percent.

Share volume for NASDAQ reached 41.3 billion during 1991; dollar volume reached $694 billion. Both figures surpassed previous highs set in 1987.

Reasons for NASDAQ's remarkable growth last year included a surge in initial public offerings by new companies, and a return of small investors to the market, many of whom favor smaller "growth-oriented" companies. Many smaller firms also trade their stocks at relatively low prices, which enables individual investors to buy more shares.

NASDAQ sectors doing especially well last year included pharmaceuticals, health services, computers, medical instruments and supplies, commercial banks, apparel, and business services. Market analyst Heiko Thieme notes that 1991 was "a year for small capitalization stocks." Some small-stock analysts have argued that the traditional "January rally" in small stocks may not be as vibrant this year, given the weaknesses in the US economy and the difficulties faced by some smaller firms in obtaining bank cred it and increasing market shares in a stagnant economy. At the same time, there is concern that the recent market surge may be abating, as investors take profits.

Some small-stock sectors, such as in the high technology area, have been doing particularly well. Biotechnology stocks have been solid performers. So too have been computer and computer software firms and health companies.

James Stack, an analyst who follows technical trends within the stock market, predicts that smaller stocks, and NASDAQ, will continue to outperform "the stodgy blue chips." Still, Mr. Stack says small-stock investors must be alert, since if a major market correction were to occur, the NASDAQ index would probably peak ahead of other market averages. He notes that such a situation occurred back in 1983, at a time of keen interest in small stocks.

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