Street Sense: The fundamentals of stock market investing
Summer Market Forecast: Cloudy
The "summer rally" traditionally begins in June. But don't count on it happening this year.

BY JERRY HELZNER

Before I ever put a penny into the stock market, I spent years reading every book and article on investing I could find.

I didn't plan it that way, but I first got interested in the market at the age of 12 when I had no money beyond my $4 a week allowance and whatever little I could earn from delivering newspapers and shoveling snow.

So I spent about 5 years playing the market on paper. I would carefully select stocks that I thought had the potential to move up and then follow them to see how I would have done if I had invested real money.

My father thought this was extremely funny. He would constantly tell me that as long as I was only investing "mentally," all I could lose was my mind.

When I was about 17, my high school graduation gifts provided me with enough cash to actually purchase a stock. It was June and, as I knew from my extensive reading, just about time for the traditional summer rally to begin.

In my innocence, I thought that a company that had a connection with summer would do well in a summer rally, so I purchased 100 shares of a New Jersey-based air conditioner company named Fedders and wound up making a couple of hundred dollars.

That was my first experience with the summer rally, and it was certainly a lucky one.

WHY SUMMERTIME IS RALLY TIME

In this article, I'll explain why the stock market has a history of rallying in the summer and why the summer rally may not occur this year.

The best explanation I've heard for the summer rally -- which normally begins in mid-June and ends just after Labor Day -- is that a flood of new pension fund money comes into the hands of investment managers around July 1. According to this theory, stocks start to rally in June in anticipation of this money being put to work in the market.

Because increased liquidity is fuel for higher stock prices, I tend to believe that the large infusion of new money in early July can help drive the market up.

But, like everything else associated with the stock market, there's no guarantee that a summer rally will occur every year. Caution is especially appropriate this year, as energy prices rise and corporations continue to warn of poor earnings ahead.

NEGATIVE NEWS PREVAILS

Despite the repeated lowering of interest rates by the Federal Reserve Board in the first half of this year, and the growing prospect of generous tax cuts, the economy is sputtering along. Companies, particularly those involved in technology areas, are continuing to lay off thousands of workers. The downturn has spread to media companies, which are feeling the effects of cutbacks in advertising expenditures.

Retailers are also feeling the pinch as the so-called "wealth effect," generated by the booming stock market of the 1990s, has evaporated. The economic statistics may tell us that the country isn't in a recession, but the confidence most wage-earners felt in recent years has now given way to a sense of uneasiness.

Until there's tangible evidence of a real turnaround in the overall economy, it will be difficult for the stock market to mount a truly sustainable rally. The news background is just too negative these days to allow anything more than brief upward spurts by stocks, such as we experienced in April and early May.

It's possible that 2001 will go down in market history as the year in which the summer rally never arrived. 

Ophthalmology Management Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.