Why Wall Street continues to defy gravity - and logic

When 10000?

The US stock market is picking up in 1999 where it left off last year: volatile but generally arcing upward - often defying logic.

Call it the Big Mo. While the market was down early Thursday after setting another record the day before, analysts say the sheer amount of money flowing into stocks will likely continue a rally on Wall Street for several weeks.

"It's pure market momentum right now," says Greg Nie, chief technical analyst for Everen Securities, an investment house in Chicago.

Longtime market watchers are calling the general upswing a happy "confluence" of factors, all cresting together at the same time. Traditionally, the start of a New Year creates a "January effect," resulting from the influx of Christmas bonuses, along with new investment dollars into tax-deferred retirement plans such as 401(k) plans and stock-index mutual funds.

This season also included continuing signs of steady economic growth in the US, along with a determination by the Federal Reserve to keep financial markets on course, through additional interest rate cuts, if necessary. The technology and financial sectors are leading the current rally, as both large institutional investors (banks and brokerage houses) as well as individual investors, scramble to buy into the Internet frenzy.

On Wednesday, the Dow roared past the 9500 point level to hit 9544.97, smashing the old record of 9374.27 points recorded Nov. 23. The broader Standard & Poor's 500 stock index and the technology-oriented Nasdaq Composite Index also entered record territory.

The duration of the current rally, however, remains in question. Lackluster trading greeted the opening of the market on Thursday, with the Dow off from Wednesday highs. Bulls, however, remain upbeat. "The underlying fundamentals are very good right now," says Alfred Goldman, market strategist with investment house A.G. Edwards & Sons, St. Louis. "But there is also a strong emotional factor. People want to buy stocks for the long haul."

THEY have decided that the equities market, for the period ahead, is the place to be, rather than the more conservative bond or money (cash) markets.

Mr. Goldman sees the market soaring up to 10000 points, perhaps hitting that peak sooner rather than later. Economic sectors that he particularly likes include pharmaceutical companies, banks, selected retailers, technology, and energy, such as deep-water drilling companies. Even though the energy sector has been hard hit by slumping oil prices, he thinks it's now ready for a renaissance.

A number of top market gurus here have been forecasting higher gains, although at a slightly lower pace than for 1998. They see the market marching upward, although not necessarily ending the year above 10000 points.

There are also prominent skeptics, however, including Robert Dickey, of Dain Rauscher Wessels, and Marshall Acuff, of Solomon Smith Barney. Mr. Dickey, for example, has talked of the market diving toward 8000 points.

Even many bulls wonder whether the current momentum can be sustained into the spring. Part of the market's rapid rise has come from the go-go Internet sector, where traditional Wall Street measurements of profit and loss have little relevance. Internet stocks hit new highs in December, largely spurred on by thousands of "day traders" - speculators armed with nothing more than a computer and modem seeking to turn a quick profit on minute changes in share prices.

In addition, the impeachment trial in the Senate is expected to add to market uncertainty. Most investors have discounted the outcome of the trial, assuming that President Clinton will survive. But that perception is based on a quick settlement. Analysts say a lengthy trial adds a disquieting element to financial markets.

The "first quarter of 1999 is going to be much better than had been expected," says Peggy Farley, who heads the investment firm Ascent Asset Management, New York. The market could well hit the 10000-point level during the quarter. But the Internet sector is a bubble "ready to burst," she says, predicting a "pull back" by spring.

What bothers Nie, of Everen Securities, is the lack of breadth in the current rally. Although many stocks are posting new highs, entire sectors remain on the sidelines, such as small-company stocks.