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Market fazed but not dizzied by bad news

By Staff writer of The Christian Science Monitor / May 14, 1984



The stock market last week had to endure: * Rising interest rates, tightening credit, and dismal performance in the bond market.

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* The resignation of White House economist Martin Feldstein, and growing Reagan administration criticism of Federal Reserve policy.

* Troubling corporate news and mixed economic news.

Most of that could do the market no good. After a valiant start on the week - including a 9.74-point rise the day the prime was boosted - the Dow Jones industrial average closed the week off 8.17 points at 1,157.14. Friday was a particularly bad day, with the Dow dropping 10.05 points.

The biggest pieces of economic news last week were the prime rate, which jumped to 121/2 percent; the Reagan administration's subsequent attack on Federal Reserve monetary policy; and the resignation of Feldstein (due both to his longstanding policy dispute with others in the administration and his desire to resume teaching at Harvard.)

Many economists expect another prime-rate increase in the near future; the bond market performed poorly as a result. Although some analysts contend a slowdown in the economy is inevitable, last week's large rise in the money supply ($2.4 billion), plus the rebounding of retail sales in April, suggested the day had not yet arrived. Still, the steadiness of the producer price index (see box) indicated that inflation has not really accelerated, either.

Troubling news for both AT&T and Continental Illinois Corporation probably hurt the market more than interest rates did. The Federal Communications Commission ordered AT&T to cut long-distance telephone rates by 6.1 percent and suggested that the company deliberately misstated its prospective income. Continental Illinois has been hit by reports that it is in financial straits.

In such a hot-and-cold economic environment some analysts are surprised that the market is holding up as well as it is.

''The stock market's sort of like Rocky in 'Rocky III,' '' says Philip B. Erlanger, chief technical analyst at the Advest brokerage firm in Hartford, Conn. ''It keeps getting hit, and it's still in there fighting.''

Not all investors are feeling quite as stalwart as Rocky, and slippage such as the market experienced last Friday could not help but be discouraging. Still, the market remains well above its April 5 low of 1,130.55. Despite Friday's showing, some analysts contend the market is holding water surprisingly well, discounting bad news in advance, and waiting for a leveling off of interest rates. If and when that occurs, an upward move might be expected.

The litmus test of when to expect such an advance, says investment adviser Robert Nurock, is the bond market. When the sell-off of bonds ends, he says, interest rates will be topping out.

Mr. Nurock, who publishes The Astute Investor newsletter in Paoli, Pa., says his tracking of 10 key technical and monetary signals indicates that the market is holding its values. Nurock says his index is flashing a ''buy signal'' for the first time since it said ''sell'' last June 17.

''Since late February,'' he says, ''the market has been bottoming rotationally. I look for one more reaction that makes the market look volatile and scary to many investors. That will reinforce the bearishness that is already fairly widespread. Then I think we'll get a rotational rally.''

During such a rally, Mr. Nurock says, the best performers will be companies that can count on earnings even with a slowdown in the economy and an upturn in inflation. He says two industry groups that can handle such an environment are chemicals and conglomerates.

Mr. Erlanger, too, considers this the verge of the second leg of the bull market that began in August of 1982. He takes heart that there is widespread bearishness today and notes that ''what will make the market good will be the conversion of a majority of doubters to a majority of believers.'' Erlanger believes the resilience of the market parallels its performance after the March 1980 bottoming: ''Fear of a big drop reaches a high point, and yet the market inches ahead.''

As this scenario unfolds, this analyst says, stocks that do well will be high-techs, airlines, autos - even the over-the-counter market. The OTC, as measured by the NASDAQ industrial index, has declined 28 percent over the past nine months.

While a major turnaround in the Dow or the NASDAQ may not be immediate, both have dropped enough in aggregate price that they represent attractive buys to investors who are interested in accumulating stocks and holding them for the long term.