Second-liners come in from cold to take up the running with Footsie

An important link was re-established in the stock market last week.

For the first time since April the two major share indices were riding at peaks at the same time although they fell from grace on Friday.

The blue-chip Footsie index had tended to make the running since April's togetherness with the supporting FTSE 250 index limping along behind.

But this year the pattern has changed and second-liners have scrambled to make up lost ground.

Although Footsie has made far more dramatic progress since April, supporting shares, as well as the smaller fry representing the market's lower divisions, have looked much more positive in recent weeks.

The catch-up will come as no surprise to many observers. After all the shares of smaller companies often seem to do well at the start of the year, probably fuelled by the rush of new year tips. If 1997 performs to form the run of the little 'uns will start petering out in the spring.

Last week's rip-roaring performance is in line with many of the forecasts from the City's army of strategists.

A strong opening, followed by a sharp dip in the summer or autumn and then a revival was the prediction heard in many quarters.

But there is also a widely held view that the market starts a year as it intends to go on. On that argument NatWest Securities' brave 4,600 Footsie forecast would appear to be in the bag.

But, of course, if nothing else the market makes its own rules. Predicting is often a hazardous exercise but when it comes to forecasting the course of equities it is frequently a fool's game.

After all very few experts get it right sufficiently frequently to be able to join mega-rich Joseph Lewis - who made his fortune guessing the direction of the currency markets and lives in the Bahamas - and enjoy the satisfaction of splashing out pounds 40m for 25.1 per cent of Glasgow Rangers.

Last year the market underlined its waywardness by outmanoeuvring most experts. The general prediction was a good first half followed by a poor second six months.

In the event, the first six months had their moments but most of the action came in the second half.

In the eyes of some followers, banks and financials hold the key to this year's display. They have been in the forefront of the equity charge and should they start to give up some of their gains then nasty cracks could materialise.

Robin Griffiths, experienced chartist at HSBC James Capel, is one fretting about the banking role and he is prepared to bet that Footsie could sink to around 3,970 points. He suggests the first two weeks of next month could be the testing time.

Mr Griffiths is, however, rather more bullish on the FTSE 250 stocks - or mid-caps as they are known.

He expects the supporting shares to throw off the shadow of Footsie and produce better performances.

Interestingly he says: "In scanning through the 250 stocks we notice many that had been in steep downtrends. Many investors feel more comfortable buying bombed-out stocks for recovery, than they do in trying to hold on to the hot tail-pipes of rocket ships. Their day has now arrived."

Merrill Lynch, the US investment house, offers an off-beat guide to the market's performance.

Its investors and insiders survey flashes a strong buy signal.

Company insiders have a good record of forecasting the direction of equity markets and although straightforward investors, without the benefit of any special knowledge, are fairly neutral it appears the actions of insiders, based on director share deals, are sending out clear buy messages.

Merrill Lynch says: "Company directors have an excellent record of timing the highs and lows of their share prices. Recently they have been buying their own shares, suggesting a good outlook for corporate profits."

Another test of whether the market is overheating is the quality of new issues. The more weird and wonderful they become the more likely it is that the dreaded crack is not far away.

There is no doubt that more and more companies, which under more subdued circumstances would not have a cat's chance in hell of scoring a flotation success, are finding it not too difficult to tap the market for funds.

The trouble is that investors get carried away.

Flushed with their success in a heady bull market they are happy to fork out for oddball shares which in the cold, hard light of a bear market would clearly be regarded as highly avoidable.

AIM and Ofex have attracted most of the fringe applicants, long on promise but decidedly short of any sign of near-term profits.

Disasters have, fortunately, been rare but when the chill winds blow the casualty rate could mount.

The only major company result due this week is WH Smith.

On Wednesday it is expected to show its recovery, directed by former Post Office chief Bill Cockburn, is continuing and should produce half- year profits more than 50 per cent higher at around pounds 38m.

The basic Smith retailing business is thought to have achieved a dramatic improvement and distribution and the Waterstone's bookshops should also have performed well.

But the Virgin/Our Price music operation is likely to have slumped into losses, probably reaching pounds 2.5m.

In August, the famous high street name reported its first deficit in more than 200 years of trading when, with a huge raft of exceptional items, it managed a pounds 194.7m loss.

Sean Eddie and John Richards at NatWest Securities believe that the company "has enormous leeway in what profit it declares" for the full year because of the pounds 283.4m set aside last time for restructuring and the sale of what was regarded as non-core operations. The NatWest guess is pounds 117m.