The stock market's hot but the forecast is hazy

The market is hot. The Dow scorched new ground twice this past week, hitting 1,320.56 and 1,327.28. And for three weeks now it has simmered above 1,300. But instead of slathering on the oil and soaking up the rays, quite a few of the money mavens are stashing umbrellas and long-sleeve shirts in their beach bags. Just in case.

Sure, declining interest rates might present a bright picture for the economy six months down the road. But between here and there, July looks like a month of dark second-quarter earnings.

Not that anyone wants to kick sand on the Dow Jones industrial physique. But cast your gaze on the American Stock Exchange or the over-the-counter market, and you'll find much scrawnier trading figures.

``This is primarily a Big Board, blue-chip rally,'' says Larry Wachtel, market analyst at Prudential-Bache Securities. ``There's no complementary action on the OTC or Amex as we saw in January and February.''

The OTC market has been sapped by tumbling earnings estimates and continued layoffs in the technology sector. Also, investors are shying away from the small growth stocks, says Steven Norwitz at T. Rowe Price, a mutual fund management firm. Apparently folks are taking refuge in larger growth companies -- the assumption being that these are more able to maintain dividends, and perhaps earnings, in a sluggish economy.

The Amex owes its laggard ways to an abundance of natural-resource companies. Generally weak commodity prices, coupled with last week's actual $1.25-a-barrel price cut in North Sea oil, have served to depress some Amex issues.

On the New York Stock Exchange, trading activity stems from the market elephants (institutions) shifting their grazing habits from bonds to stocks. ``Money managers are going from safe-and-sane fixed-income securities into safe-and-sane equities,'' says Mr. Wachtel. ``The whole thing is interest-rate-motivated.''

The bond market has been soaring on talk of another drop in interest rates orchestrated by the Federal Reserve. Yields have come down, putting stock returns more on a par with bonds. ``For 21/2 months now the bond market has been very strong,'' says Monte Gordon, research director at the Dreyfus Group mutual funds. ``But maybe it's running out of steam. So, yes, there is some shifting [from bonds to stocks], on the premise they don't expect rates to fall further.''

Another rationale for the shift to stocks is that a cut in the discount rate would invigorate business by the fourth quarter. But Mr. Gordon may be one of those bumbershoot toters.

He is concerned that if the dollar remains strong relative to other currencies, it may sabotage the Fed's efforts. Lower interest rates might spur consumer spending, but the beneficiaries could be the overseas manufacturers of cheaper imported goods. ``There is a very serious question as to whether the Fed will actually help domestic companies.''

If the Fed does cut the discount rate, it may trigger a sell-off. ``The period of vulnerability will come when the cut in rates occurs,'' Wachtel figures. ``The good [interest rate] news will be over. Then, what else is there to look forward too? [Investors] will be looking at second-quarter earnings and say, `Wow, we're overextended.' ''

Mr. Gordon suggests investors should be eyeing their interest-rate-sensitive stocks. ``Maybe you should start thinking about taking profits,'' he counsels. Apparently a few people are already selling. Of late, utility stocks have been lagging the overall market.

Meanwhile, oil price cuts and record spring traffic have sent airline stocks into the stratosphere. Mr. Gordon isn't looking for a ride on these issues, but Wachtel (who agrees they're overbought now) would consider purchasing on any loss of altitude.

Drug and retail stocks, however, do have a place in the Dreyfus portfolio. Gordon brushes off last week's flat sales reports from major retailers. ``You've got to look ahead. You've got to be in the group now to benefit later. And if the economy is going to improve, you have to assume consumer spending in the retail segment.''

Like most on the Street, technology stocks have little appeal for Gordon. But Wachtel is willing to dabble in blue-blooded techies. ``If you wanted to lean against the grain and be patient a bit, say, pick up an IBM or a Digital, we would countenance some of that.''

Nevertheless, using the Dow thermometer, this remains a hot market. The Dow Jones industrial average rose 1.01 points for the week, closing at 1,316.42 on Friday. But Wachtel cautions, ``We're well into our third year. You're not going to see any raging rallies. You've got to climb aboard in the hazy lateral periods.''

Hazy lateral periods? Hmmm. Maybe that's what the brollies and long-sleeve shirts are for. Chart: Interest Rates. *Yields; Source: Bank of Boston.

Percent Prime rate 10.00 Discount rate 7.50 Federal funds 7.50 3-mo. Treasury bills 7.15 6-mo. Treasury bills 7.28 7-yr. Treasury notes 10.14* 30-yr. Treasury bonds 10.52*