Summer rally is blooming, the market-watchers say

A summer rally on Wall Street is as traditional as short sleeve shirts and seersucker suits. Stock market analysts figure that Wall Street started its summer run-up last week.

The rally was partly inspired by the feeling that the Federal Reserve Board, after months of keeping its fists closed on the money tap, had finally poured investors a cold lemonade by backing down at least somewhat on interest rates. And some investors began to talk as if the Fed would deliver a pitcher of lemonade, and not just a glass of it, causing rates to fall still further.

In addition, institutions had built a hoard of cash, which started to flow into the stock market faster than ice melts on hot pavement. Thus, last week, volume soared and the Dow Jones industrial average climbed 14.55 points, closing at 828.67.

Summer rallies, observes William LeFevre, vice-president for investment strategy at Purcell, Graham & Co., have been occurring fairly regularly since 1946. Some have lasted only as long as an evening thunderstorm, while others have wafted along through July, August, and September. The best gain, he recalls , was in 1970, when the Dow jumped 22.5 percent during the summer rally. The worst gain was last year, when the best the market could manage was a 0.4 percent increase. He says the average rally has been about 9.3 percent.

If the market were to manage an average gain, says Robert Colby, an analyst with Smith Barney, Harris Upham & Co., it would last about five weeks, thus extending into mid-August. Mr. Colby figures the rally started about July 9.

LeFevre says an average gain would take the Dow to about the 860 level, while Colby says his research suggests a top of about 870. Some analysts, taking a contrary view to current Wall Street pessimism, believe the rally may last longer than expected. Ralph Acampora, a vice-president at Kidder, Peabody & Co., says the Dow could actually test the 900 level before backing off again.

''The environment is right for a rally,'' he comments. ''There's a lot of cash out there and the market is tired of going down and looking for excuses to go up.''

This rally, says Larry Wachtel, a vice-president at Bache Halsey Stuart Shields Inc., reminds him of one that occurred in March, after first-quarter earnings were released. He says Wall Street had so totally discounted the bad earnings statements that when companies actually issued the statements, stocks rose.

Even though stocks are rallying, analysts are not calling the run-up the beginning of a bull market. Mr. LeFevre says the government's need for cash will keep interest rates high, noting that ''the stock market rises on the availability of credit.''

Furthermore, he finds that normally the stock market discounts recessions by six to nine months. Thus, he does not believe the economic slump will end until this fall. Hence, corporate managers will still have some more bad months to survive before their balance sheets start to improve.

In past summer rallies, most stocks have participated. But Mr. Colby says that in this rally his firm particularly likes the consumer noncyclical stocks such as electric utilities, soaps, food concerns, soft drinks, and selected drug companies.

Mr. Acampora thinks the stronger groups in the rally will be aerospace companies, especially General Dynamics and Raytheon, the airlines (particularly American and Delta), the apparel companies, autos, beverages, electric utilities , mobile homes, computer companies, food stocks (including A&P), and soaps (particularly Clorox). Groups to avoid, he says, will be fertilizers, coal stocks, insurance companies, railroads, bank stocks, metals, and forest products companies.