Bull market smashes old records

In August, the stock market rallied in anticipation of lower interest rates. Now, analysts say it has sprung to life in expectation that the economy is headed for recovery.

In six trading sessions, the Dow Jones industrial average surged some 80 points, pushing the average to 1,070.55, a new high set Dec. 27. The old record of 1,064.49 was set Nov. 3. Most of the buying has been in the so-called blue-chip stocks, composed of basic industries that have been hurt the most by the long recession. Steel stocks, chemicals, and forest products companies, ignored in the market's fall surge, perked up.

Even though the Dow was up, Hildegard Zagorski, a second vice-president for research at Prudential Bache Securities, points out that the market was tossed by many crosscurrents, including year-end selling for tax advantages. Investors with losses in stocks have to take them by year-end to use them for 1982 tax purposes. She says another crosscurrent was so-called portfolio windowdressing, where institutional buyers often purchase stock at the end of the quarter in companies that have performed well so their clients believe they have picked the right stocks. With all these factors, she says, it becomes even more difficult to predict the market's direction on an hourly basis.

Furthermore, William LeFevre, an analyst with Purcell, Graham & Co. Inc., says the market traditionally rallies at year-end.

Since this year's rally has been centered in the hard-pressed blue chips, some analysts believe the market is anticipating the economic recovery. Robert Stovall, first vice-president at Dean Witter Reynolds Inc., notes, ''Institutions are setting up pilot positions - as they like to call them - in depressed stocks which will participate in the world wide economic recovery.'' Investors have been particularly enthused by auto stocks because car inventories are low and sales have rebounded from depressed levels. Likewise, the rally has helped steel companies and building supply firms.

Interest rates continued to fall, which helped the stock market. On Dec. 28, Chase Manhattan Bank lowered its prime interest rate, the rate it charges its best corporate customers, from 11.5 percent to 11 percent. Analysts say they expect the Federal Reserve Board to lower the discount rate - the rate at which it lends funds to member banks - in January. The Fed recently lowered the discount rate to 8.5 percent from 9 percent. Furthermore, the rally in the bond market should continue, says John A. Mendelson, a technical analyst at Morgan Stanley & Co. Inc. The bond rally, he points out, has been the ''engine'' for the stock market's advance.

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