Does a 10000 Dow need a warning label?

Only biggest firms drive index's historic advance, leading to questionsabout the durability of bull market.

No sooner did the Dow Jones Industrial Average blip past the 10000 benchmark than ebullient stock traders along Wall Street could be heard rejoicing, "Now we're heading toward Dow 11000."

However brief, the Dow's historic spike above 10000 on Tuesday morning let loose a stream of unbridled optimism among thousands of small investors, pension-fund managers, and titans of corporate America. But the traders' expectations notwithstanding, pushing even higher may not be so easy.

The reason: The Dow's march to 10000 points mainly represented the large company stocks (General Electric, Chevron, Coca Cola) at the top tier of American business. Indeed, it was an upbeat earnings forecast from Union Carbide that first propelled the Dow to its record high.

But thousands of small to mid-size companies - as well as many technology companies - remain tucked away in the shadows of low or diminishing returns. They have yet to join in the euphoria.

Moreover, even as the 30-stock Dow and the blue-chip Standard & Poor's 500 index have set new records in recent months, fewer firms are hitting individual highs - a statistical divergence that worries market strategists.

Within the financial community, questions are arising about when - and how - the broader market can join the current rally. Some experts say the inability of mid-size and small firms to join the stock bandwagon may spell problems for the durability of the bull market itself. "The narrowness of the advance is a red flag hanging over the entire market," says Robert Dickey with the investment firm Dain Rauscher in Minneapolis.

"Just one or two stocks can push the Dow up," explains Peggy Farley of Ascent Asset Management, a financial firm here. "[Last week] it was the oil stocks that initially did it." On Monday, the advance was broader, with technology companies joining industrial firms in their march upward. By Tuesday, the Dow was in easy striking distance of the 10000 target, almost a year since it first passed the 9000-point level on April 6, 1998.

Because the advance is limited to so few companies, "one has to wonder" if the rally will have legs in the weeks ahead, Ms. Farley says. She sees a strong likelihood of "retrenchment within the market" because of worries about future earnings growth.

Indeed, the Russell 2000 Index, which tracks small companies in the US, continues to lag. The index is now lower than it was in July 1998, before the market decline that spread into the fall of the year. The Russell 2000 is down some 5 percent since the start of 1999.

Meanwhile, the S&P Midcap stock index is down about 4 percent from its high last July.

"The narrowness of the advance is as pronounced at it has ever been in this bull market," says Arnold Kaufman, editor of The Outlook, a market review published by Standard & Poor's Corp. Fewer companies are now revving the engines of market growth, he says.

Consider these statistics: In October 1997, when the market set a new high, more than 600 companies recorded their "personal best" on the New York Stock Exchange, Kaufman says. When the market set another new peak, in March 1998, 370 companies set highs. In July 1998, before last summer's correction, only 190 companies hit new highs. In January 1999, when the market hit another peak, only 150 companies hit new highs.

A shrinking number of stocks setting records means there's less room for the market to post sizable gains, says Kaufman. It also suggests that a downturn may not be far away. "Retrenchment seems likely," he says.

Mr. Dickey, however, believes the market is now entering a "blowout stage" that will be marked by euphoria as investors scramble to climb aboard the bandwagon. That upbeat sentiment will feed on itself, he says, perhaps even driving the Dow toward 11000. But as that mark approaches, he says, stockholders might want to "take defensive action" in case the party ends with an unhappy bang, as euphoric rallies tend to do.

Al Goldman, market strategist for investment house A.G. Edwards & Sons in St. Louis, is upbeat about the latest market gains: "The bull market is alive and well." But because it has a narrow thrust, investors should buy into the market with care. "Selectivity" is crucial, he says.

That's the case with mutual funds. Sheldon Jacobs, who publishes the No-Load Fund Investor, Irvington-On-Hudson, N.Y., says that among general-purpose no-load equity funds he monitors, the majority have yet to top their levels of July 1998.