Not Even Summer, yet Stocks Sizzle

Summer arrived on Wall Street early this year.

Flush with cash, enthused by the absence of rising inflation, investors continue to pump new money into stocks, pushing the Dow Jones Industrial Average to record highs.

Last week the Dow slammed through 7500 and kept right on going, up 346 points. Up 4.5 percent for the week, an astounding 20 percent for the year.

Summer rallies are a mainstay of the financial world, as many stock pickers head for holidays, mailing in their investment checks as they rush out the door. The past two summers brought brief rallies (and also brief downturns).

But this year's rally started early, "long before the [June 21] summer solstice," says Charles Crane, chief market strategist at investment firm Key Asset Management in New York.

"This market feels awfully frothy," says Mr. Crane. Investors, he says, should be wary.

"High valuation levels are being totally ignored. Investors are snapping up whatever looks good on the shelf," he says.

"The summer rally is here now," says Rao Chalasani, chief investment strategist at Everen Securities in Chicago.

Some analysts now see the Dow at 8000 by summer's end.

The latest trigger for stocks was Friday's report of an unexpected drop in wholesale prices for May, the fifth consecutive monthly decline.

Also in May, soft retail sales suggest little need for the Federal Reserve to raise interest rates to fight inflation.

But Brian Belski, at investment house Dain Bosworth in Minneapolis, predicts the market may lose its zip after Labor Day, with "a 10 percent or so pullback to around 7000."

Mr. Belski notes that more major companies than usual are pre-announcing - warning ahead of schedule - that earnings will not meet analysts' expectations. Those reports help take the edge off investor disappointment, in turn bolstering the market.

Stocks are now being largely driven by mutual fund money, Belski adds. And fund managers are gunning for the large, blue-chip companies that have led the rally.

The blue-chip fervor pushes some strategists in the opposite direction: toward small and mid-size companies as well as "defensive" plays, such as some retail issues, that could weather a slump.

One Boston investor, for example, recently yanked his retirement holdings out of a growth-and-income mutual fund and plunked it into a "mid-cap" fund, investing in companies with capitalization (stock value) between $250 million in $1 billion.

"That's absolutely the correct way to go right now," says Charles Crane of Key Asset Management in New York. "Small-cap and mid-cap stocks represent far better value than large-cap funds."

"The two sectors have both awakened from their slumber earlier this year," he says. The Standard & Poor's Small Cap 600 index, for example, is up slightly over 9 percent year-to-date; the S&P Mid Cap 400 index is up 12.5 percent. But both indexes lag behind the 20 percent gains of larger companies.

"Rotation" - shifting from underperforming sectors to those doing well, such as financial stocks - "is the hallmark" of a savvy investor in the late stages of a bull market, says Hildegard Zagorski of Prudential Securities.

Mr. Chalasani likes companies that make consumer goods, as well as some financial stocks and real estate investment trusts (REITs). Among specific issues, he sees value in Land's End, Walgreen, Arden Realty, Pfizer, and PeopleSoft.