This is the month that we do our annual revamping of the INC. Index, an event now as regular -- and, unfortunately, as unpredictable -- as the coming of spring. We go through this exercise each year concomitant with our compilation of a fresh batch of the country's 100 fastest-growing small public companies. (see INC., May, page 155).

Changing the lineup of an index in midstream presents something of a challenge, to which certain arbitrary concessions have to be made. One concession involves the summary expunging of stocks selling for $2 or less: Because the index measures group performance in terms of percentage gain or loss, the handful of such low-price issues would otherwise distort the results. Inactive stocks also have been cropped out, because they are not truly representative of the forces of supply and demand that a stock market average attempts to portray. Taking such factors into account, we have eliminated a total of 11 INC. 100 stocks from the index. The 89 that remain comprise an unfactored average based on stock price alone.

As can be readily observed in the accompanying table and charts, the new batch of INC. 100 companies was as susceptible as the old to the bearish tide in the equities of young companies that set in last June. Indeed, the newcomers fared a bit worse. The reason has to do with the fact that only 25% of last year's index members made it into the new index.

The rest of the INC. Index companies are all making their first trip in the fast lane, many having just gone public. No bear market tolerates newcomers well, since they are completely untested in their ability to perform in the face of selling adversity. Their stockholders react quickly, not only to group trends (such as those that have engulfed the microcomputer industry), but also to twitches within individual companies. Thus every time a new batch is introduced, the INC. Index performance tends to be exaggerated. That is the nature of speculation and, by definition, the INC. 100 is a speculative lot. After all, fast growth rates are unlikely to be sustained as a company grows older and wiser.

Then, too, investors can hardly be reassured by the recent history of some INC. Index alumni. One has only to review five-year chart patterns in individual issues to realize that speculative stocks are on a long-term selling trend -- a bad sign for post-election business. If the investment community is right, the economy may be in for a rough time, since it cannot push ahead indefinitely on the tired bodies of blue chips. An even worse sign: Some of today's most worrisome technical top formations have been traced by erstwhile fast-growing companies that have fallen flat, so to speak. The lofty price-earnings multiples at which high-fliers once sold can't be sustained without the prospect of per-share earnings enhancement.

One might view all this with complacency if one can assume that the worst is behind us. Alas, the assumption is untenable: The charts of many issues, particularly those of technology stocks and ex-INC. companies, suggest that many of these tops are barely beginning. Indeed, the vast technology group now looks like the oils did back in the late '70s, before the momentous collaps of the stocks of that industry. Based on the charts themselves, an observer has to predict that either a bear market in growth stocks will continue despite the companies' ability to keep growing (thus bnnging P/E ratios into single-number dimensions), or the companies will find growth itself impossible to sustain.

Of course, it is true that the stock market was overvaluing growth companies for well over a year -- beginning with the August 1982 bull market rally and continuing into the new-issue orgy that abated last fall. Buyers were bidding up the stocks of unproved companies based on projections of P/E ratios that were three years out. And why not? The rush into equity in 1982 felt like a knowledgeable endorsement of the health of the economy. But now it is clear that it resulted from little but confusion over interest rates, and reflected a flight from bonds by investors with no place else to put their money. At the same time, it is also apparent that fast growth demands investment caution; markets suddenly dry up (if, in fact, they were there at all), and today's hot product can quickly become tomorrow's inventory glut.

But let's not get too gloomy. For one thing, speaking from the statistical indicators, the overall intermediate term (six months or so) picture has been improving in most sectors, and is not as discouraging as it was last summer. Which suggests that the structure of the long-term underpinnings may get shored up by events -- mainly the result of November's election -- before much more erosion takes place. For another thing, technically, one of the best-looking industries around today happens to be, at long last, the oils. Which proves that investors have a way of overselling stocks as well as overbuying them. And that it is best not to bargain hunt until the charts say that it is OK.