(MONEY Magazine) – All in all, the first half was about as good as small investors could reasonably hope for. After expanding at a 4% annual rate in last year's second half, the economy slowed to an estimated 1.6% growth rate in the first six months of 1993. That easy jog allowed corporate profits to advance without generating enough inflation to push up interest rates. As a result, stocks hovered near record highs in June, while bond prices advanced to levels not seen for 16 years.

This is no time, however, to abandon the caution that we've been advising for the past year. The presidential cycle -- the remarkably consistent pattern of stock-price changes over the four years of a President's term -- is about to go to red alert. In the classic presidential cycle (shown in the chart above), stocks begin rallying about a year and a half before an election. Reason: ''The Administration usually has a strong desire to get the economy into good shape,'' explains Peter J. Canelo, chief investment strategist at NatWest Securities in New York City. As a result, interest rates are cut -- or at least held low -- and any potentially disruptive economic policies are postponed. A stock boom generally follows that lasts into the first year of a presidential term, at which point, most smart commanders-in-chief try to get all the unpleasant stuff over with so that the voters will have forgotten about it by the next election. Result: ''Stocks typically peak in August of the first year of a term,'' says Tim Hayes, senior analyst at Ned Davis Research in Nokomis, Fla. And the weak market that follows often lasts into the second year. Now that we're about to reach that August moment of truth, investors should take a skeptical view of stocks -- and long-term bonds as well. The cycle has been on track so far; since Jan. 1, the Dow industrials have advanced 6.5%, a bit more than the average 4.7% upswing in the first eight months of the average cycle. And most forecasters think that the Clinton economic plan could trigger a setback. ''Right now,'' says Canelo, ''the stock market is expensive, and conditions are in place for increases in taxes and interest rates.'' One smart stock-picking approach is to focus on cheaply priced shares that other investors have passed over. And of course, the safest strategy when you take some profits is to keep the proceeds in cash.

BOX:

THE ECONOMY Growth is slowing and will lope along at an annual rate of less than 3% through year-end.

STOCKS The market is overvalued and will be increasingly vulnerable to a setback of 15% or more.

BONDS Although the bond market has been performing well, interest rates could start moving up within the next couple of months, pushing down bond prices.

CHART: NOT AVAILABLE CREDIT: Source: Ned Davis Research CAPTION: The four-year presidential cycle

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: ECONOMIC DATA