Back to the Blue Chips

Wall Street hates a mystery -- uncertainty is bad for the market -- but it has harbored a mystery of its own for the past few weeks. While the U.S. economy enjoyed its fastest-rising first quarter in peacetime history, while hundreds of stocks surged ahead, while the bulls clearly outnumbered the bears on the Street, the Dow-Jones average of 30 industrial blue chips barely moved after it hit a record of 906 in early February. Last week, in a series of stirring sessions, the blue chips finally took off. Led by General Motors, A.T. & T., Woolworth and Swift, the market climbed to records on three straight days. The Dow-Jones soared from 901 to a new high of 912, barely retreated to close the week at 911.

Sitting on Cash. The blue chips, big and broadly held, were just catching up with what the smaller issues have done so far this year. While the Dow-Jones stocks rose only 2% during the first quarter, calculates Wright's Investors' Service, the 1,226 commonly traded issues on the New York Exchange jumped an average 8% each. Among the sharpest gainers, Admiral Corp. rose 58%, KLM Airlines 94%, Allied Products 137%. Wall Street's smaller, cheaper issues (average prices: $52 for all stocks on the Exchange v. $75 for the Dow-Jones blue chips) have been sent up by Main Street's small-money investors and other private traders. After being scared away by the 1962 break, investors trading in odd lots of fewer than 100 shares are steadily moving back into the market; they accounted for 71% of the trading volume in the first quarter.

One main reason that the Dow-Jones averages have not kept pace with other stocks is that the large institutions, which account for 25% of the market's trading and deal mostly in blue chips, have been sitting on their cash. Surveying the mutual funds, pension funds and insurance companies, E. F. Hutton & Co. found that, from January to April, 20 out of 25 of them sold more than they bought. In last week's surge, insiders spied a change in the institutions' attitude. Reported Bache & Co. to its customers: "The institutions, which were on the sidelines for several weeks, appear to have re-entered the market, as evidenced by the number of large blocks traded in recent sessions."

Positive Outlook. The institutions are moving back in because the market is sturdier than a month or two ago, and offers some good buys among the blue chips. The market has successfully absorbed a series of new stock offerings (notably General Aniline's), which normally bleed cash from other stocks, and it has weathered the usual rush of tax selling before April 15. On the international front, the U.S.'s military gains in Viet Nam, the nation's apparently successful campaign to narrow its balance-of-payments deficit and Britain's determination to solve its problems with a belt-tightening budget have generally given Wall Street a more positive outlook. Then, of course, there are all those record corporate profits (up some 9% in the first quarter) and bright economic indicators at home (see THE NATION). So long as they continue, the stock market is almost certain to move well up into the 900s by year's end, even if it does not reach the magic 1000 figure that some Wall Streeters look for.

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