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First Ask, Why Do I Want to Buy Now?


If you're an individual investor who's tempted to dive into stocks after watching the market surge to new highs on Monday, the first thing you should do is take a long, deep breath.

Rather than rush in at what could be the tail end of a sharp advance, experts say investors should first ask themselves why they'd want to buy now.

Specifically, are you a long-term investor who believes that the economic outlook for 1999 and beyond fully justifies a rising stock market? Or are you a short-term trader who's simply anxious to cash in on market momentum?

"The big question today is, are you making a long-term investment or reacting to a market?" said Jonathan Lee, managing partner of Hollister Asset Management in Century City.

Many investors, after being scared off by the market's summer pullback, stashed all or part of their portfolios in money market funds or other "cash" accounts. But unless they had the foresight--some might say the luck--to get back in when stocks began rebounding in early October, they've lately watched other people make huge paper profits while their cash returns have dwindled as the Federal Reserve has cut interest rates.

At least one important lesson from this rebound is an old one: Timing the market is very, very difficult. That's why many financial pros say no investor should ever be completely out of the stock market.

If the question is whether to put additional money to work in stocks now, the market's bulls think there are plenty of reasons for enthusiasm. Not only has the summer market crisis--sparked by sinking foreign stocks and teetering institutional "hedge" funds--subsided, but the bulls say the global economy's outlook is improving.

What's more, some analysts say the widespread concerns about corporate profits--which fell 3.2% for the blue-chip Standard & Poor's 500 companies overall in the third quarter--are overblown.

Yes, earnings have been hurt by Asian economic woes, the bulls say. But if Asia is bottoming and the United States and Europe surprise naysayers with stronger-than-expected economic growth next year, earnings growth may well revive.

Bears counter that the market is more overvalued than it has ever been and that recent gains are ominously concentrated in a handful of big stocks, just as they were when the market peaked in July.

Move Cautiously, and Have a Plan

For those who want to buy into stocks now, the best advice may be this: Move cautiously and stick to a disciplined buying strategy.

"They shouldn't just go out emotionally and throw all their money at the market," said David Ryan, head of Ryan Capital Management, a Santa Monica-based hedge fund. "They have to have a set of rules."

Ryan and other bulls believe the market is in an uptrend and that there are good stocks to buy.

Ryan, a onetime protege of Investor's Business Daily founder William O'Neil, says many of the strongest stocks made their moves several weeks ago when the recovery began and have become extended. Nevertheless, he likes Nokia (ticker symbol: NOK/A); Mohawk Industries (MHK) and Sonic Automotive (SAH).

The bullish case goes like this: Rather than a bear market, the summer pullback in stocks was a selling panic caused by a flood of bad news hitting all at once. But now, thanks in part to three Fed interest-rate cuts, the economy will steer clear of a recession and consumer spending will remain strong heading into Christmas.

Peter Canelo, an equity strategist at Morgan Stanley Dean Witter in New York, says corporate profits were clipped by several one-time events this year, besides Asia, that will not be present in 1999.

For example, some big technology companies incurred operating losses in the first half of the year as they spent money to retool their plants for a new product cycle. Banks and brokerages suffered big hits from trading losses. And oil companies were clobbered by falling oil prices.

Altogether, he says, those forces slashed more than $20 billion from operating earnings for the S&P 500 this year.

But these forces are unlikely to emerge again in 1999, and without them, earnings next year could rise 10% or more, he says.

As for stock sectors, Canelo likes technology, retailers, regional banks and drug companies.

Canelo concedes that, looking at price-to-earnings ratios relative to interest rates, blue chip stocks are overvalued by about 5% to 6%. But in the last several years, the market has frequently surprised Wall Street by remaining overvalued compared with historical yardsticks. Canelo says that even with the current overvaluation, "that still gives you room for 10% to 15% higher prices, depending on earnings."

Some other forces are positive. Though they've backed away from their extremely aggressive buying of several weeks ago, corporate executives continue to scoop up shares in their companies at a brisk pace, data show. That's a sign that despite the recent run-up in stock prices, those in the best positions to understand their companies still feel they're good values.

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