After their recent run-up, stocks take a breather

After moving ahead for six weeks, the stock market paused last week. Even the continued drop in interest rates failed to pull the buyers off the sidelines, and a steady rain of selling resulted in the Dow Jones industrial average easing 3.25 points for the week. It closed at 850.85. Volume remained high on the pullback.

The retrenchment surprised few analysts. Most, in fact, said they were expecting some form of consolidation after the 100 points the Dow tacked on since mid-April.

However, Robert Stovall, an analyst and director of investment policy at Dean Witter Reynolds Inc., says he thinks there is more to the market's pullback than just profit taking. Rather, he says, Wall Street is torn between a series of positive signs that augur well for investors and some negative factors.

On the positive side is the improved interest rate environment and lower inflation rate. Also, stocks should be helped by investors being aware that price-to-earnings ratios begin to improve about halfway through a recession as the stock market looks ahead to an improving economy. There are large sums of money sitting in the money-market mutual funds, too, which may be diverted toward the stock market as yields drop to the 10 percent level.

Hanging over the market, however, he says, is the fact that even as interest rates are falling, the number of new debt and equity offerings is surging. This new supply of offerings, which totaled $5.25 billion in the corporate bond market during May, has taken the edge off investor enthusiasm to buy stocks. In short, corporations are so hungry for cash they are absorbing all the buying power that exists in the marketplace.

Frank Parrish, vice-president of Fidelity Management & Research Company and portfolio manager of the Puritan Fund, is also convinced the stock market will mark time for a while. He expects the Dow to remain in an 800-to-900 trading range, perhaps finally breaking out on the upside after the November elections. He says the conservative mood of the country should be beneficial for the stock market, which will register a shift in the national attitude toward business. Until then, he counsels, it would be smart to be a bit cautious about the market. "There will be some terrible earnings coming up," he says, "and I'm not sure if the market has discounted them yet."

Ralph Acampora, an analyst with Smith Barney, Harris Upham & Co., says he would also not be surprised if the stock market were to sit still for a while, or even decline. But, he adds, "the shakeout would be very quick and we could see another run-up again."

Like the stock market, the bond market last week also showed some signs of weakness. Eileen E. Spinner, another Smith Barney analyst, attributed this sinking to the inevitable correction from the previous week's sharp gains, as well as the larger volume of issues on the market. She notes, however, that traders were encouraged at the end of the week by the fact the dollar had not sold off despite a reduction in the discount rate by the Federal Reserve Board.

Gary Wenglowski, a Goldman, Sachs & Co. analyst, says the decline in the bond market is probably not over yet. He foresees "a sharper decline in interest rates during this recession and a quicker upturn" than would normally be experienced. But he does not expect the downturn to be any longer than the postwar average of 11 months.

In the market last week, the oil stocks were battered about like a baseball during a double-header. "The oils are no longer the dominant leaders that they were," Mr. Parrish of Fidelity explains, "although there is nothing fundamentally wrong with the companies." Instead, he points out, the increased taxation of the oil companies on both the federal and state levels is causing some reassessment of the issues. Analysts are also trying to figure the impact of the oil surplus on the companies.

Strong issues last week included the drugs, textiles, oil service stocks, and interest-sensitive stocks such as utilities. American Telephone & Telegraph stock was active and higher as interest rates fell and its operating subsidiaries found a more receptive climate for their bonds.

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