The Dow Chugs Full Steam Ahead - To 6,000 Points?

SPARKED by the prospect of falling interest rates, low inflation, and steadily rising corporate earnings, the American stock market is roaring into the second half of the 1990s like a freight train thundering down the track at full speed.

In late November, the Dow Jones industrial average crashed through the 5,000 point barrier for the first time. It took only 193 business days to rise from 4,000 points to 5,000 points - one of the headiest market advances ever. On Friday, the market closed at 5,087 points.

Now, from mutual-fund companies to financial planners' offices to brokerage houses, there's talk about the market reaching 6,000 points by spring 1996 and possibly even on to 7,000 points by the end of the year or sometime in 1997.

"The market continues to roll forward and is looking very strong," says Hildegard Zagorski, an analyst with Prudential Securities Inc. For now, she adds, no obstacle appears likely to check that momentum. "Low interest rates and the prospect of another rate cut on Dec. 19, [when the Federal Reserve's policy-making Open Market Committee meets] are propelling the bond market to higher levels," Ms. Zagorski says. "And the good performance in the bond market is pushing the stock market higher."

"The market is in a very powerful bull market trend now, and I don't think there's anything in sight to check it," comments Gene Jay Seagle, president of Tactics & Techniques Inc., a market consulting firm in Weston, Conn. Based on statistical data, "this market is very similar to the 1986 bull market," he says, which means "the current market could move another 10 percent higher, to around the 5,700 point level on the Dow."

How long can it last?

Still, for all the euphoria here, some are beginning to question how long the market can continue to soar.

Privately, these analysts are expressing guarded caution because underlying fundamentals - such as relatively high price-earnings ratios, particularly in technology stocks - are flashing warnings signs about an overpriced market. Memories here are not always short when personal fortunes are on the line. The red-hot market of 1986 and early 1987, many recall, was followed by the crash of late 1987.

Thus, some investment houses are slowly rebuilding the cash position of their portfolios to be ready for any eventuality, including a market downturn, while also being more selective about which stocks to buy.

Companies that have expressed some caution in recent months include Salomon Brothers Inc., Standard & Poor's Corp., both of New York, and Everen Securities, based in Chicago.

Most analysts who anticipate a correction say it would be relatively modest, on the order of 5 to 10 percent.

Volatility expected

At the least, in the months ahead substantial trading volatility is expected, says Gregory Nie, chief statistical analyst at Everen Securities Inc. Part of the reason, he says, is that perceptions about the market change daily now, given such contradictory signals as huge trading-volume patterns (a bullish trend), and the frequent lack of market breadth - with stocks of small-and medium-size companies occasionally lagging behind the bigger companies in the Dow and the S&P 500. Lack of breadth, he says, is a more bearish trend.

"The market has entered a 'danger zone' that could go on for a long time, maybe even as long as a year," says John Winthrop Wright, who heads Wright Investors Service, in Bridgeport, Conn. "What we've had, in the past few years, is a 'rolling readjustment,' in the market," with some sectors falling, while other sectors soared. That readjustment, he says, "will continue."

Investors, Mr. Wright says, should be "very selective" about what they buy and follow trends carefully. "The market [through its indexes], will always tell you where it is going," he says.

Usually, a person will have three to four weeks to bail out (sell overpriced stocks), before the onset of a full-scale bear market. "If a stock could possibly be lower [in price] any time in the months ahead, then it is better to put off buying that stock until it reaches the lower price. Only buy those stocks right now that you truly believe will not go down in price."

Wright says he believes that if a correction occurs it will not be more than 15 percent, which would mean a modest downturn.