Many market-watchers say they're poised for a year-end rally

By , Staff writer of The Christian Science Monitor

The stock market, which had experienced a rather broad decline the past five months, is poised for a year-end rally, a number of Wall Street-watchers say. Analysts see these signs as portentous:

* The strong upward movement of the market two weeks ago, and its apparent consolidation the past week. (After a series of ups and downs, including a 3.65 point drop on Friday, the Dow Jones industrial average closed the week at 1,251. 02, up less than a point for the week.)

* The traditionally strong Thanksgiving-to-Christmas period, followed by an election-year economy.

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* Continued moderate inflation; no significant increase - perhaps a slight decrease - in interest rates.

Even with last week's mediocre performance, ''the market has been giving a very good account of itself,'' says E.F. Hutton analyst Newton D. Zinder. ''We think it is preparing for another rally beginning (this) week.''

Mr. Zinder believes the five-month ''correction'' (or ''consolidation,'' depending whether one's favorite sector was severely hit or not) served to take the excesses out of the market. He sees the next few months as continuing to be good for the performance of higher-capitalization stocks (such as auto, steel, and heavy machinery companies), with secondary and speculative stocks lagging.

At Prudential-Bache, on the other hand, analyst Larry Wachtel believes the divergence of performance between DJIA high-capitalization stocks and the broader market has ended. The American Exchange and the NASDAQ have been improving, and the Dow Jones transportation average has achieved new highs. At this point, Mr. Wachtel says, the Dow industrial average is actually underperforming the market.

''I think the consolidation is complete,'' he says, ''and the market should move up in what is a seasonally strong period.''

Although he advises continuing to choose stocks issue by issue, Wachtel generally sees long-depressed capital-spending stocks as a good buy. He also recommends defense-related stocks.

Dean Witter Reynolds research director Lee H. Idleman agrees that the market is in a strong position, saying the only question is whether it will be ''a rally or the second leg of the bull market.'' He thinks it might be the latter and is predicting economic - and stock market - gains through 1984 and into '85.

If a second leg is approaching, he contends, then the ''clock starts again,'' and best buys will be in defensive stocks. As confidence rises in 1984, investors may even move back into high-tech stocks. Idleman says it is too early to move into capital-spending stocks.

At Drexel Burnham Lambert, James Balog notes that the five-month ''correction'' has been a period of waiting to see what happens to the economy. He says the widespread perception now is that the economy is going to accelerate in a classic cyclical pattern.

Mr. Balog is a bull on capital-spending issues. Even with high interest rates , he says, capital spending will occur as plant operating capacity begins to approach 85 percent: ''If demand is high enough (for a product), interest rates will not be inhibitory.''

A bit of a damper for more enthusiastic investors came last week from Salomon Brothers' influential economist Henry Kaufman. He predicted long-term interest rates could rise to 13 percent during the latter stages of the economic expansion next year. Another damper might have been Congress's approaching agreement on raising the debt ceiling. This would make an increase of government borrowing imminent, and ''crowding out'' could drive up interest rates.

But quite a number of economists take exception with the Kaufman prediction, arguing instead that White House pressure on the Federal Reserve to ease up on its tight-money policy during the coming election year will go far toward moderating interest rates.

An unknown in the next few weeks is how the market will react to the new American Telephone & Telegraph stocks.

AT&T, which last week issued a weighty estimate of how its eight component parts would fare after divestiture Jan. 1, will begin listing 1.6 billion shares of stock on the New York exchange today.AT&T rose modestly the day the company earnings estimate was released but then seemed to hold steady. Analysts say it will be weeks before enough is understood about the eight new companies for price patterns to be established.

Prudential-Bache's Mr. Wachtel believes the unprecedented issuing of these new phone stocks will lend ''effervescence'' to the market. E.F. Hutton's Mr. Zinder, however, figures the market has already discounted this event and the new AT&T stock will be ''a big yawn.'' Drexel Burnham Lambert's Mr. Balog sees the new AT&T stock as starting slowly but becoming a growing factor in the market as time goes by.

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