Not Everyone Is Eager for Dow to Bust Through 3,000

Hey, Dow Jones--don’t do us any favors. Stay below 3,000.

Perverse as it sounds, that might be the best way to ensure that the current broad stock market surge continues. Because so far in this stunning rally, most of the market has been doing just fine without much help from the infamous Dow Jones average of 30 industrial stocks.

To some market pros, the danger here is that the Dow will finally break 3,000 and give everyone a sudden case of vertigo.

On Tuesday, the Dow awoke from a three-week snooze, soaring 58.41 points to 2,972.52. That puts it just 27.23 points, or 0.915%, away from its all-time high of 2,999.75 reached last July 16 and 17. And if the Dow can muster just a hair’s breadth more--0.924%--it will reach the historic 3,000 mark.

While the Dow is still struggling to make a new all-time high, however, several broader but mostly ignored market indexes have already mashed into record territory. In fact, the big story of the Victory Rally born of the Persian Gulf War is that it has largely been an EBTD rally: Everything But The Dow. Take a look:

* The composite index of all stocks traded on the New York Stock Exchange reached 201.18 on Feb. 13, topping the previous record of 201.13 set last July 16. Tuesday, the NYSE index jumped to a record close of 205.74, up 3.66 points.

* The Standard & Poor’s 500-stock index, which like the Dow is considered a blue-chip index, reached its first record close of 1991 on Feb. 13, with the NYSE index. Tuesday, the S&P; zoomed 7.39 points to a record of 376.72, well above the 368.95 high of last July.

* From Jan. 1 through Feb. 28, the Dow rose 9.4%. That may look hot, but it was the smallest rise of any major market index. In contrast, the S&P; 500 gained 11.2%, the Wilshire index of 5,000 stocks jumped 12.4% and the NASDAQ index of mostly small stocks soared 21.2%.

What does the EBTD rally tell you? That this is an extraordinarily powerful market move because investors are buying stocks of every size, on every market--no longer just the biggest, safest issues in the Dow. “It’s extremely bullish,� says Ken Spence, a technical analyst at Salomon Bros. in New York. “This is very broad-based.�

The backdrop for this rally, meanwhile, has been the perception that, despite the market’s gains, stocks still haven’t returned to their 1990 peaks--let alone to uncharted territory. Never mind the record highs for the NYSE and S&P; 500 indexes; almost no one remembers where they close day to day. When most investors gauge the market, they look at, and remember, only the Dow.

And that index’s inability to crack new highs has helped fuel the broad buying spree so far this year because of investors’ perception that it’s not too late to jump in. There’s a certain comfort you can take in knowing you haven’t bought at the absolute top. The Dow’s laggard performance has continued to suggest to most investors that the “market� still is safe--we’re not even at the old high yet.

So what happens now, with 3,000 easily within reach at last? Most Wall Streeters admit that no matter how much they’d like to believe that these Dow benchmarks don’t mean much, there is significance to them. They are the only reference points of value to investors when peering back into history for guidance. At 3,000, the market will collectively have to pause and think for a little bit.

“When you get through 3,000, clients will pay more attention,� admits money manager John DeGroot at U.S. Trust of California in Los Angeles. “Every passage like that makes people pay more attention to what their dollars are invested in.�

DeGroot, for one, doesn’t believe he’ll like what he’ll see at 3,000. “I’m cautious now about the market, and if we get to 3,000, I’ll become even more cautious,� he says. Corporate profits are still down, DeGroot notes, and investors are making a big bet on a fast economic recovery this year. If that doesn’t happen, stocks are going to begin looking very expensive, he says.

Many analysts, however, believe that investors’ appetite for stocks has become so strong that the Dow is likely to sail right through 3,000 and not look back. Yes, the bulls admit, the economy is still fragile--but there are increasing signs that it is recovering, including Tuesday’s report from auto makers that their long sales slump may be coming to an end.

To the bulls, a market that was smart enough to foresee the great allied victory over Iraq must be smart enough to see an economic recovery this summer. Hence, “when we go through 3,000, I think it’ll just bring in more people,� argues Dan Sullivan, editor of the Chartist market newsletter in Seal Beach. He sees the Dow continuing to surge to at least 3,200 in the near future.

Other analysts suggest that whether or not the Dow has trouble at 3,000, the rest of the market won’t care. Salomon’s Spence believes that investors are finally focusing seriously on smaller stocks, which have spent nearly eight years in the doghouse. The values that investors are finding in the small-stock arena are so compelling, Spence argues, that there is almost nothing that can halt the buying momentum for very long.

And in fact, small-stock proponents note, the NASDAQ index of smaller stocks remains about 3% below its all-time high set in October, 1989, despite this year’s rally. So even if investors become spooked by a Dow of 3,000, they can find comfort in knowing that the stocks they really want--the red-hot smaller issues--aren’t even back to their 1989 highs yet.

Still, some market bulls would just as soon see the Dow Jones average continue to struggle here rather than slice through 3,000. After all, that prescription has worked beautifully for the rest of the market thus far. Why mess with success?

THE DOW’S RAPID RISE

Dow Jones industrial average on the quarter hour (Tuesday 3/5/91 from 10:00 to 4:00)

Monday: 2,914.11

High: 2,986.11

Close: 2,972.52, up 58.41

WHERE THE INDEXES STAND

Index close Status NYSE composite 205.74 record high NASDAQ industrials 530.69 record high S&P; 500 376.72 record high Dow industrials 2,972.52 still 0.9% below record of 2,999.75 set 7/16/90 NASDAQ still 3% below record composite 473.05 of 485.73 set 10/09/89 Amex market value 354.39 still 11% below record of 397.03 set 10/10/89 NASDAQ still 42% below record banks 302.88 of 526.64 set 3/20/87