Watching the bandwagon in stocks: time to hop on or jump off?

High noon. Down in the cavernous lobby of Grand Central Terminal, the crowd is forming again. It grows almost daily, pressing against the glass walls surrounding a tiny Merrill Lynch information office. All eyes are fixed on a green phosphorescent display tracking the stock market. Last week, the visitors' vigil was rewarded. The Dow Jones industrial average burst through the 1,400 mark for the first time in history.

Even so, the crowd this day continues to swell. An unshaven man in topcoat and gray fedora squeezes past the knot blocking the Merrill Lynch door. His right hand is grimy from clasping a newspaper carefully folded to the stock pages.

``Where's the market headed?'' he asks, echoing a bystander's query in disbelief.

``Up,'' he grunts, and scurries off.

Up, indeed. Almost two dozen record highs have been hit this year by the widely followed Dow Jones index of 30 industrial stocks. By fits and starts since 1982, this bull market has galloped more than 600 points uphill, an 80 percent increase.

The Dow industrials first punctured the 1,000 mark in 1972. It took more than 10 years (until Feb. 24, 1983) to climb to 1,100. Two months later, the 1,200 mark was shattered. The market took a breather in 1984. But this year ushered in a rally that broke the 1,300 mark by May 20.

In this latest charge, the more-cautious investors note that the biggest gains have so far been limited to the 30 large New York Stock Exchange companies making up the Dow index.

The more broadly based stock indexes have yet to return to the highs they hit last summer. But a blossoming cadre of Wall Street analysts is gushing over the possibility of 2,000 on the Dow a few years hence.

What's behind the latest buying blitz?

Essentially, expectations of lower interest rates.

In a speech two weeks ago, Federal Reserve chairman Paul Volcker indicated, in his own vague way, that interest rates would fall before long. Since the Fed controls the money supply, and thus influences the price (interest rate) banks will pay for that money, his comments were fuel for a rally.

When interest rates on bonds fall, investors tend to buy stocks. They turn to stocks in expectation of a better return.

Part of that expectation is built on the assumption that lower interest rates will stimulate borrowing and therefore more spending. Sales and corporate profits will rise, making stocks more valuable. Thus, the recent round of buying.

But if you haven't bought by now, Ralph Acampora, chief technical analyst at the brokerage firm of Kidder, Peabody & Co., thinks you may have missed most of this rally. ``The Dow at 1,450 is do-able between now and the year-end,'' he figures.

It may even climb higher if the buying spreads beyond the Dow to the thousands of less-expensive smaller companies traded on the American Stock Exchange and the over-the-counter market.

But many Wall Street-watchers say investors aren't confident enough in the economy to buy the smaller companies yet.

As one analyst puts it: ``General Electric has been around for 100 years. I have confidence in its future earnings. But XYZ semiconductor company is one of 30 firms that exist in a market of ever-changing technology. I'm not as confident in its future earnings.''

Without stock buying of non-Dow companies, Mr. Acampora predicts, this rally will falter. ``The Dow will decline 10 or 15 percent in the first half on 1986. Every four years there's a major buying opportunity; the last time was 1982. I see mid-'86 as a major market buy. And that will set the stage for -- I don't know -- 2,000 on the Dow?''

But Michael Sherman disagrees with Acampora's near-term forecast. He advocates buying now. ``The trend is up,'' surmises Mr. Sherman, who is head of Shearson Lehman Brothers' investment policy committee. He expects prices to go 10 percent higher in the next three to six months.

When the market is near a top, speculation often abounds. Mr. Sherman doesn't see such speculation at this point: ``The market may be at 1,400, but people don't feel like 1,400.'' He points to the sluggish agricultural sector, weak commodity (oil, metals, crops) markets, and cities where the commercial real estate markets are soft.

The rally will continue to be fueled by lower interest rates, Sherman opines. Central to this view is the agreement by the Group of Five industrial nations (G-five) agreement to devalue the dollar. ``The G-five agreement is an explicit recognition that the growth of the world economy is a central problem,'' he says.

It is a recognition that the United States economy will not fully recover until other economies perk up and start buying US goods and services. ``You're not going to get growth in the world economy with [a high dollar and] high US interest rates.''

Another reason for Sherman's bullishness is the largely untapped buying power of the general public.

He says -- and Merrill Lynch's chief market analyst, Robert J. Farrell, agrees -- that the 1980s are and will continue to be a period of low inflation. But most investors, Sherman says, have yet to accept this premise.

``People tend to fight the present,'' he says. ``They look at the '60s and '70s, when inflation was rampant, as the way things should be.

At that time, any investment in real assets [gold, real estate, art] outperformed financial assets [stocks and bonds]. The '80s are the reverse of that. I believe you will see higher relative returns on financial assets through the end of the decade than you will if you hold gold or real estate.''

There are, of course, other schools of thought on this bull market. Robert R. Prechter Jr., a disciple of the Elliott Wave Theory, is one of the more intriguing examples. Like Sherman, he believes this is the middle, not the end, of the bull market. ``I don't see any important indication of a major top here. The best move is yet to come,'' Mr. Prechter says.

Earlier this year, he said the Dow would reach 1,600 in 1985. The last few months, he's been saying he expects 1,700 by the end of the first quarter of 1986. This month the Dow may falter, he says, but ``I think this market is going to be tremendous in the months of December and January.''

Prechter, based in Gainesville, Ga., publishes The Elliott Wave Theorist newsletter. His opinions are based on R. N. Elliott's studies in the mid-1930s, which mathematically quantify and correlate changes in public mood with the stock market's ups and downs.

Prechter says the current bull market reflects mass optimism about the future. And stock prices have a way to go, he says, because that public buoyancy hasn't peaked.

Recently, Prechter released a study showing that stock market psychology is paralleled by fashion, movie themes, literature, politics, and popular music.

``As the public becomes more optimistic, people become more flamboyant,'' he says. ``They dress with more flair. They buy upbeat music. They go see adventurous movies. And they buy stock. At the extremes in expression, you find extremes in stock prices. We're not yet at the extremes.''

He says that in the bearish late '70s and early '80s preceding this bull market, horror movies, punk music, and maxi skirts were in vogue. Today, he contends, the US public still has not reached the carefree attitudes of the '60s, when the Beatles and Beach Boys filled the airwaves and stocks were booming.

Prechter concedes that such indicators are too unrefined for forecasting the market. On the other hand, if Gidget movies return to vogue, you just might want to keep your broker's phone number handy.